Friends, Cannabis Musings will be off next week, but ahead of that, we’re going to take a quick look at today’s announced merger of multistate operator Cansortium with RIV Capital, which owns vertically-integrated assets in New York. As is standard, the companies posted a handy investor presentation walking through the highlights of the transaction. This is something of a merger-of-equals, with Cansortium shareholders owning about 51.25% of the combined company, and the RIV Capital shareholders and Hawthorne Collective owning about 48.75%. It’s good to see, because I’ve been a skeptic for a while about cannabis M&A activity due primarily to the liabilities. So, let’s talk about what this deal is doing to address that.
We first talked about RIV Capital back in August 2021 (when Cannabis Musings was hosted on my old law firm’s platform). Hawthorne Gardening, a subsidiary of publicly-traded Scott’s Miracle-Gro focused on cannabis cultivation supplies, announced a $150 million investment into RIV Capital. At the time, RIV Capital was basically a cannabis-focused investment vehicle traded on the Toronto Stock Exchange. Hawthorne made its investment by purchasing convertible notes (basically, a loan that may be converted by the lender into stock of the borrower, giving the lender both exposure to the upside on the equity and protection to the downside as a creditor) of RIV Capital, which, I speculated at the time, was done to protect Scott’s Miracle-Gro, a New York Stock Exchange-traded company, a layer of protection from being deemed to be directly owning a plant-touching company (which, among other things, could threaten its exchange listing). Indeed, the press release for the notes said that the funds could not “presently be used to invest directly in cannabis or cannabis-related operations in the U.S. unless and until such operations comply with all applicable laws of the United States.”
In effect, this gave Scott’s (through Hawthorne) exposure to U.S. cannabis while reducing regulatory risk. It was very similar to U.S.-based Constellation Brands’ $4 billion investment into Canadian LP, Canopy Growth Corporation, which then itself purchased an option to acquire U.S. MSO Acreage Holdings, Inc. Canopy paid Acreage’s shareholders for the option (or “right”) to purchase all of the stock of Acreage when (effectively) cannabis is legalized in the U.S., although they later changed that to also allow the option to be exercised when the New York Stock Exchange and Toronto Stock Exchange, which both listed Canopy’s stock, would allow it. That eventually happened.
Turning back to the deal, according to the investor presentation, RIV Capital has $65.9 million of cash and $175.0 million of debt (in the form of those Hawthorne convertible notes), while Cansortium has $8.5 million of cash and $69.3 million of debt. In other words, RIV has a pile of cash and some debt that’s kind of like equity, and Cansortium has debt and a bissel cash. How do they pull off this khasense with so much existing debt? Well, they’re making this marriage by trading the $175 million of RIV’s convertible notes (plus accrued interest) into stock of the combined company. Hawthorne has reportedly agreed to exchange the debt for equity in the combined company, the same move that Ayr and 4Front pulled last year. Poof! Problem solved. By swapping the notes for stock, the combined company is significantly de-levered (has less debt), ending up with $74.4 million of cash and $69.3 million of debt.
But, you may be wondering, how can Scott’s Miracle-Gro own, through its Hawthorne subsidiary, stock of a very plant-touching company? Well, Hawthorne will be receiving non-voting shares of the combined company that have no dividend rights (though, to be totally honest, what cannabis company is so cash-rich to be issuing dividends?), but are convertible into voting shares of the company. By taking this defanged equity, it gets to make the argument that it has no control rights in the combined company, and won’t be receiving any cash flow (exposing it to money laundering issues), and so, for regulatory purposes, it doesn’t “own” a U.S. plant-touching company, even though it has a large financial stake in one (not legal advice). Regulatory fun!
(The press release does say that Hawthorne will be limited to owning no more than 19.99% of the voting stock of the combined company, which does sort of have the flavor of cannabis regulatory concerns, but I’m guessing it has more to do with Canadian Securities Exchange takeover rules that kick in when a shareholder crosses the 20% threshold (also not legal advice).)
I’m curious to see whether we see more of these grand deals – M&A with debt restructuring. It works well with companies that have debt like Hawthorne’s convertible notes, more investor-focused than institutional-focused (like a more traditional bank loan or a sale-leaseback).
Starben un chasene hoben farspetigt men nit. (“It’s never too late to die or get married”).
Be seeing you!
© 2024 Marc Hauser and Hauser Advisory. None of the foregoing is legal, investment, or any other sort of advice, and it may not be relied upon in any manner, shape, or form. The foregoing represents my own views and not those of Jardín.