Hundreds of millions of dollars have been raised for cannabis-focused SPACs (Special Purpose Acquisition Companies) over the past 12 months, making them one of the hottest tickets of 2020. Add to that the celebrity names attached to some SPACs and you can see why they’re getting the attention they’re getting. SPACs draw a lot of focus, but does it make sense for the average investor to join in?
While it seems like SPACs just appeared on the scene, the instruments have been around for some time, and were really popular right before the 2008 financial crisis. After that, their popularity faded somewhat and they didn’t really make a big comeback until 2020. For example, in 2019 just 59 SPACs were launched. But in 2020, 248 SPACs were started, making up 50% of the total IPO volume for the year.
Investors in a SPAC IPO often get in at $10 a share with a half warrant to buy another share at $11.50, along with the right to redeem their stock for cash value ($10 plus interest) if they do not like the company being merged with in the qualifying transaction (QT). But those who invest in a SPAC on the exchange get a slightly different proposition. They also receive the right to redeem their share for $10, but no warrants.
“So what they are generally buying seems to be the ‘story’ -- that the SPAC sponsor and management will be successful, and the investor can join their team and profit from their success,” writes cannabis investment company Bengal Capital.
Bengal Capital’s Jerry Derevyanny further noted that “you can see this in the cannabis SPACs from the fact that many of them trade at a significant premium to their redemption value -- meaning that investors are valuing the right to ‘join the team’ greater than the right to get $10 of cash.”
Picking The Right Team
So, if the key to choosing the right cannabis SPAC revolves around the team, then these three are the most promising teams assembled:
1. TPCO Holding Corp. SBVCF SBVQF
In Jan. 2021, TPCO Holding Corp. completed its qualifying transaction to acquire CMG Partners Inc,. better known as Caliva, and Left Coast Ventures, Inc., with global hip-hop icon, entrepreneur and Monogram founder, Shawn “Jay-Z” Carter, and entertainment company Roc Nation. Investors aren’t likely to see much gain from sales of the Monogram cannabis line, however. It’s a premium product, and loyal cannabis consumers -- the ones that make weekly and monthly trips to the dispensary -- aren’t the people who will drive sales. That’s why so many brands have added value lines to the portfolios. The team that investors should be focused on is Roc Nation. That’s the secret sauce that will propel this company to the top of the revenues chart. The combination of Roc Nation's access to top athletes and musicians, plus its overall marketing prowess, should create brands that others will be envious of. TPCO said it expects pro forma revenues of $334 million in 2021. While the cachet of Jay-Z may have added glitz to this SPAC, don’t expect to be partying with the media mogul if you buy shares.
2. Ceres Acquisition Corp. CERAF
Last month, Ceres Acquisition Corp. entered into an agreement that would result in multi-state cannabis operator Parallel becoming a public company. The investors are said to have an oversubscribed private investment in public equity (PIPE) of $225 million, and the deal is expected to close in Summer 2021. The deal values Parallel at an implied enterprise value of $1.884 billion with expected net revenues of $447 million in 2021. The expected pro forma cash on hand is $430 million at the close, including the $225 million from the PIPE and $120 million of cash held in Ceres’ escrow account assuming no redemptions. This company’s pedigree includes chewing gum heir William “Beau” Wrigley Jr., who is Chairman and CEO of Parallel, which was once named Surterra Wellness. Wrigley has been involved in the cannabis industry for a few years now and is more than just a famous name. He added former Patrón Spirits Company CEO Ed Brown to the board in 2019, who brought his expertise in vice product branding to the company. In addition to that, Scott “Scooter” Braun, who is the co-founder of Ceres Group Holdings, is known for his music industry investments and ventures. While his spat with Taylor Swift over ownership of her early master recordings has brought some infamy, Braun is also credited with discovering Justine Bieber. He has a knack for being on target when it comes to trends, which is an asset in the fast-moving cannabis industry.
3. Silver Spike Acquisition Corp. SSPK
In Dec. 2020, Silver Spike Acquisition Corp. announced its agreement for a business combination with WeedMaps, or WM Holding Company, that would result in WeedMaps becoming a public company on the Nasdaq marketplace. The estimated post-transaction equity value of the combined company was approximately $1.5 billion, and provided up to $575 million of gross proceeds through the approximately $250 million of cash held-in-trust by Silver Spike Acquisition Corp. and a fully-committed common stock PIPE of $325 million. WMH has grown revenue at a compound annual growth rate of 40% over the last five years and was on track to deliver $160 million in revenue and $35 million in EBITDA for 2020. The company said in a statement that as a result of outsized demand, the PIPE offering was significantly oversubscribed and upsized. As a result, just last week, Silver Spike Acquisition Corp II priced a $250-million IPO that is to be listed on the Nasdaq Capital Market and trade under the ticker symbol SPKB. WeedMaps CEO Chris Beals has steered the company away from listing unlicensed dispensaries and has managed the growth to become the leading marketplace for cannabis consumers looking for purchasing information.
Timing Is Key
Once the team is chosen, it’s all about the timing, as it is with every investment. Bengal Capital pointed out that among SPACs that merged between Jan. 2019 and June 2020, the median percentage of IPO proceeds that was redeemed (that is, the cash was given back to the holder of the share) equaled 73%, and over one-third of SPACs had over 90% redemptions. According to Bengal, redeeming shareholders averaged an annualized return of 12%. Unfortunately, due to these redemptions, a year later, the post-merger returns of the SPACs were down by 35%.
One of the first cannabis SPACs was MTech Acquisition, whose QT in 2018 was cannabis software company Akerna (KERN) - Get Report. Over 4.4 million shares were redeemed prior to the IPO as investors exercised their displeasure with the deal. However, the stock popped in the early days of trading and even hit a high of $72 on June 1, 2019, before settling down to trade around $10 through the summer. The stock has struggled to maintain its value, though, breaking below $10, and it was lately selling at $5.80. Still, just six months ago it was selling in the $2 range.
It seems that early investors in cannabis SPACs might not have very long timelines. However, if they sit back and wait for the original SPAC players to dump their shares, then a bargain can be had.
Debra Borchardt is a regular contributor to Real Money, TheStreet’s premium site. Click here to learn more and get great columns, commentary and trade ideas from Jim Cramer, Helene Meisler, Stephen Guilfoyle and others.
At the time of publication, Debra Borchardt had no positions in any of the stocks mentioned in this article.