PSPC cannabis deals peak after investors snub the industry

U.S. blank check companies considering cannabis companies are struggling to find suitable targets and many are merging into unrelated industries as the weak market performance of recent Special Purpose Acquisition Corps listings has shaken confidence.

Hopes of legalizing recreational marijuana use in the United States have seen state-owned cannabis companies enjoy some of their best gains after Democrats gained slim control from both houses of Congress and pledged federal reform.

The ensuing frenzy saw 18 cannabis-focused PSPCs raise around $ 3.3 billion in August, with more than half of the amount invested in the PSPC mergers. But with Democrats making little progress on their promises, the euphoria has fizzled out.

Bankers and investors have said cannabis PSPCs that have yet to finalize the deals could see negotiations run into problems. HERBL, a California-based distributor, has faced a drop in valuation in recent months during merger negotiations with BGP Acquisition Corp, Reuters reported in August.

As a global boom in PSPCs that started last year has subsided and these vehicles are struggling regardless of their target industries, cannabis-focused blank checks have been hit particularly hard.

All but one cannabis companies listed in the United States through PSPCs since 2020 are trading below the IPO price of $ 10 per share. By comparison, 46.5% of PSPCs overall have been trading higher since their mergers, according to data provider SPAC BoardroomAlpha.

“The share price is incredibly important – it’s the optics that investors are looking at – but it’s not the end all, be everything,” said Joe Caltabiano, founder of Choice Consolidation Corp. “Where it becomes a problem is if you ultimately need additional capital.”

Caltabiano, who listed Choice Consolidation in Canada in January, said a “multitude of reasons make capital markets more difficult today than they used to be.”

CANADA’S WICKERS

Most important of their problems is the fact that cannabis companies still cannot appear on the main US indexes because marijuana remains illegal at the federal level, forcing them to list in Canada, where trading volumes represent only a fraction of the American level.

Shares of U.S.-based cannabis companies are down 11.4% this year after jumping 60% in February, according to ETF AdvisorShares Pure US Cannabis. Meanwhile, the MJ ETF, which tracks global pot stocks, is up 5.5% this year.

PSPC sponsors across industries have struggled to raise funds through stock sales in recent months due to regulatory crackdown, exacerbating problems with the cannabis trade.

Caltabiano has said he’s optimistic about a recovery in equity markets, but his PSPC is turning to debt financing.

A shortage of target companies large enough to meet transaction size requirements is also forcing cannabis SPVs to buy into unrelated industries. According to Viridian data, five of the 18 PSPCs raised so far have merged into industries unrelated to cannabis.

Tuscan Holdings Corp II, another cannabis-focused PSPC, is now considering merging with a real estate tech company, two sources told Reuters.

Despite the challenges facing SPACs and public procurement, private venture capital has remained strong, forcing SPACs to overpay when buying a private company, said Bill Grownley, partner at the law firm Goodwin.

Mercer Park SPAC bought Glass House in April at a multiple of 28.8 times EBITDA (earnings before interest, taxes, depreciation and amortization), compared to public peers trading at 15.7 times EBITDA on average, according to Viridian.

“The entire venture capital world is on fire and valuations are very high across the board, whether it’s cannabis or not. If PSPCs don’t work, a cap on potential exits must inevitably have to. affect valuations in the private market, ”said Grownley.

“It’s just a matter of who blinks first.”