Mergers with SPACs have always been an alternative to traditional IPOs. With the IPO market effectively minimized for the time being, SPAC mergers are an increasingly desirable public market liquidity option for private companies.

What the numbers tell us

2020 is a record-shattering year for a revitalized SPAC market. According to data provided by ELLO Capital, there have been 95 SPAC IPOs so far in 2020, raising $37.8 billion (average size: $397 million). That compares with 59 in all of 2019, which raised $13.6 billion (average size: $230 million).

On July 22, 2020, Pershing Square founder Bill Ackman raised $4 billion in the IPO of Pershing Square Tontine Holdings Ltd., the largest SPAC IPO to date. With an initial target of $3 billion, the SPAC included a unique pricing approach: a fixed pool of warrants to be distributed to shareholders who accept a subsequent deal – increasing the take for approvers.

“COVID-19 is likely a direct cause of the acceleration in SPACs this year, as global lockdown policies have restricted travel and the ability to do roadshows. As a result, SPACs have largely replaced traditional IPOs,” said Mark Young, co-founding partner of Bridge Point Capital. “Plus, SPACS appeal to the high-growth technology sector, which has led the market recovery post-February correction, and continue to drive grwoth in the work-from-home economy.”

SPACs: rules of the road

• Speed is the name of the game – Leveraging the market expertise of leadership team, a SPAC can raise funds in a matter of days, without the time and resource demands of a roadshow.
• Minimum value is set – The acquired company/companies must have a minimum value, generally 80% of the fund the SPAC has in escrow following the IPO. Multiple closings, obviously, complicate the otherwise-simple SPAC process and inject completion risk into the transaction.
• The clock is ticking – There’s a deadline reality for both the SPAC and the target: If the SPAC doesn’t close the deal by the deadline, it must return the funds it raised in its offering. On the flip side, getting near the deadline can help give a target company some leverage.
• Valuation risk – Investors in SPACs are very much like IPO investors: there is an expectation that they are buying at a discount and there is significant growth potential around the corner. They are not looking for turnaround stories. In turn, SPACs are perceived as focused on growth verticals.
• Shareholder approval required – The SPAC is a public company that inherits all the baggage – reporting/regulatory demands, liabilities, etc. – of a public company. Approval by target company shareholders likely will be required. And the SPAC would need to file a proxy statement and secure approval from the Securities and Exchange Commission.
• Redemption risk – Here’s an interesting twist: At the time of the transaction, the SPAC’s public shareholders can redeem their stock. The risk: the SPAC’s cash availability – which might be needed to complete the transaction – could take a hit if the redemptions are significant.
• Warrants also in play – Sometimes the purchase price includes stock; the value of those shares are impacted by the associated rights. In most cases, the warrants can be exercised at a premium to the original offering price. What can happen: the valuation of stock included in purchase price may rise above, or fall below, the value of the stock issued to a target. The driving factor: can a deal actually get done.
• Navigate the de-SPAC phase – Definition: the time between the definitive agreement and closing. What needs to be done: communicate details of the transaction to the SPAC’s stakeholders. The goal: optimize the story, educate sales people, engage analysts – protect value.

The record so far

• DraftKings (NASDAQ: DKNG): Shares in the online fantasy and gambling company jumped to $18.69 per share when the merger agreement was announced in December, and then edged up to $19.35 per share on the first day of trading, Since then, the price has climbed to about $44.00 per share before settling back into the $37.00-$40.00 area. Its current market capitalization is over $13.5 billion.
• Virgin Galactic (NYSE: SPCE.N): The Richard Branson-backed competitor to Elon Musk’s SpaceX and Jeff Bezos’ Blue Origin, Virgin Galactic shares currently trade in around $17.00-$20.00, about double their late October day-one level, and more than three times their low of $6.90 per share. The stock has reached a high of $42.49 per share, and the company’s current market capitalization is $3.9 billion.
• Nikola (NASDAQ: NKLA): The green truck company has been on a roller-coaster ride since its late June debut. It has climbed as high as $93.99 at one point and currently trades at about $37.00 per share. Market capitalization is just under $14 billion.

Leading the way is a pending deal from Churchill Capital Corp. III, which has agreed to acquire health-cost management services provider MultiPlan for $11 billion. This would make it the largest ever SPAC deal.

“The healthcare and life sciences industries are two sectors likely to continue driving SPAC growth in the COVID-19 era,” said Nadia Tian, co-founding partner of Bridge Point Capital. “This is because healthcare traditionally outperforms the market in a recession, SPACs allow biotech companies to have more cash on hand than a traditional IPO, and the government and consumers are especially focused on these areas as we search for solutions to the COVID-19 outbreak.”

Final thoughts

Private companies that were planning an IPO or other significant M&A deal before the global economic downturn caused by the COVID-19 pandemic may want to seriously consider a SPAC deal. As with all transactions significant, intensive planning, vetting, due diligence and other considerations must be undertaken.

MGO’s dedicated SEC practice has experience with IPOs, RTOs, M&A deals and the unique characteristics of SPAC acquisitions. To understand your options, and the path ahead, please feel free to reach out to us for a consultation.

Alternative paths to US exchanges

There are a variety of reasons companies would prefer to avoid a traditional IPO. For those entities we provide tailored solutions during the entire go public process – or portions of it – including the pursuit of alternatives such as a Regulation A+ offering and reverse mergers. We help each client find the path that’s right for their unique needs.

Bridging cultures

Our China practice has the language skills and cultural understanding to navigate market complexities. Call or contact us online to find out how we can help you.

The trade-off is greater public and regulatory scrutiny, and often, fundamental changes to the way a business operates. We’ve assembled this guide to layout the roadmap for a successful IPO. Utilizing experience gained from years of developing registration statements, auditing and preparing financial statements, and conducting due diligence, we present the core steps and concepts required. The IPO process is complex, resource-intensive, and pocked with pitfalls to the unprepared.

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Meanwhile, the steady march toward legalization has fueled remarkable growth in the cannabis sector over the last several years. While the outlook on cannabis remains bullish, many wonder how this emerging sector will respond to a major economic downturn.

Will the steady stream of retail capital, venture capital and private equity funds spurring cannabis industry growth dry up and bring expansion to a shuddering halt? Or will the cannabis industry – and individual cannabis private and public companies – demonstrate the historical counter-cyclical behavior we’ve come to expect from ”vice” industries, such as alcohol and tobacco?

Likelihood of a recession

The experts can argue about the severity and the timing, but – on the heels of an extraordinary 10-plus years of economic growth and stability – most agree that it is at least wise to prepare for a significant slowdown. Portfolio adjustments are probably in order, as prepared investors will start considering bonds, dividends, stability and commingled accounts.

It is also time to start thinking about defensive stocks – and add cannabis and cannabis-related equities to those considerations. If you have an option to invest through private markets, those opportunities may hold a key to more value, albeit with slightly less transparency to the public market.

Alcohol and tobacco’s recession track record

Clearly, the cannabis industry has never encountered a recession and as such, we can’t revisit history and cite earlier performance, milestones to watch or other informative data.

We can, however, note that the industry would enter a recession with what arguably appears to be very strong fundamentals. According to one report:

• Global consumer cannabis spending is expected to surge 38% in 2019 to $16.9 billion, up from an estimated $12.2 billion in 2018, $9.5 billion in 2017, and $6.9 billion in 2016.
• Compound annual sales growth between 2017 and 2022 is expected to average 26.7%, with $31.3 billion in global marijuana sales expected in 2022.

Additionally, the industry got an important kicker in 2018, when passage of the U.S. Farm Bill made hemp legal nationwide.

It can also be insightful to go back and review the performance of comparable industries, in this case we will examine “vice” industries, specifically alcohol and tobacco. All have track records that provide at least some degree of visibility of what we might expect from cannabis.

The alcohol/tobacco example that followed the recent Great Recession is particularly informative. Consider (information compiled by financial information company Sageworks):

• In 2008, the first full year of the Great Recession, alcohol sales increased 9% and the average unemployment rate was 5.8%.
• In the 12-month period June 1, 2010-May 31, 2011, alcoholic beverage sales grew 10% in the U.S. and the unemployment rate hit 9.6%.

Takeaway: Consumers cut back on a great number of things when the economy turned, but drinking was not one of them.

Lessons (and non-lessons) learned from individual stocks

Are there lessons to be learned by the performances of some of the individual stocks during and immediately following the Great Recession?

Yes and no.

Anheuser-Busch Inbev (NYSE: BUD) delivered a 39.4% return in 2008, which was nearly 80% better than the S&P 500. Revenue, however, climbed just 5%. The strong performance was not based on financial performance but, rather Anheuser-Busch’s acquisition by Inbev.

Lesson: Undervalued companies with market share will get noticed.
Shares of Altria (NYSE:MO) the parent company of Marlboro among other brands, gained 28% between December 2007 and December 2010. In the middle of that period (2009), the National Institutes of Health (NIH) put out a paper stating that smokers actually increased their cigarette intake during a period of economic difficulty.

Lesson: Price increases can offset weak sales. Brand power has value. Dividends are important in downturns.

Molson Coors (NYSE:TAP) is an interesting example, as the company’s “average-Joe” brand was overwhelmed by craft beers in the Great Recession. Example: the share price of The Boston Beer Co. Inc. (NYSE:SAM) advanced 80%. The issue has since been rectified, with numerous acquisitions, including Blue Moon, Leinenkugel, Hop Valley and Revolver. (Sidebar: Molson Coors, like Constellation (NYSE:STZ) before it with its acquisition of Canopy Growth (NYSE:CGC), also has a deal with cannabis company Hexo (NYSE:HEXO) to develop non-alcoholic cannabis-infused drinks in Canada.

Lesson: Consumers seek out “stress relievers” during stressful times. People with a little extra disposable income will consume products at the higher end of the pecking order.

Diageo (NYSE:DEO) is a global juggernaut, with a huge portfolio of brands, including Johnnie Walker, Smirnoff, Captain Morgan, Ketel One, and Guinness beer. The company continued to be highly profitable during the Great Recession, dropped a bit the next year and then more than recovered in 2011. Their dividend payout ratio is just over 50%.

Lesson: Brand power stays strong during a downturn.

Other factors to consider

There are a number of intangible differences across the cannabis industry that also need to be considered in any analysis:

• Illicit Market, Red Ink? – One major difference between cannabis and alcohol/tobacco is that in a recession the cannabis industry would still have to deal with the competitive pressures and potential price cutting of the illicit market. As an economic downturn puts pressure on consumers’ wallets, we could see a resurgence in illicit market offerings, cutting into legal profits.
• Strong Medical Tailwind – The cannabis industry really is two distinct sectors: adult-use and medical, and the differences are profound. As stated in the Cannabis Private Investment Review, the adult-use market is broader and has long-term growth potential, but the medical market has a number of strong characteristics. For example, U.S. public opinion is overwhelmingly in favor of medical cannabis; ample models of successful regulatory programs; the progress of medical cannabis at the pharmacological level, and the FDA’s 2018 approval of the first CBD-based medicine, are clearing the path for further de-scheduling of cannabis compounds.
• Mature Support Sectors In Place – The opportunity for cannabis investors extends beyond the well-known cultivation, manufacturing and distribution brands. Companies focused on research and development, accessory products, services, publishing and software all have carved out positions as well. In a recession, certain sectors may decline, but the diverse array of companies representing the cannabis industry could produce a mixed bag of winners and losers, evening out the industry’s performance as a whole, or even floating poor-performing sectors.
• Lawyers. Bankers. Politicians – Right now, the future of cannabis as a legal and regulated industry appears more promising than at any previous point as industry growth is being stimulated on several fronts. Doctors are beginning to embrace the medicinal value of cannabis and they are incorporating it into their practices. This is also supported by new efforts to enhance research and development throughout the US and internationally. Lawyers are pushing for legalization in jurisdiction after jurisdiction. Investment bankers and Venture Capital and Private Equity firms are stimulating a flow of needed capital. And even politicians are seeing that legalization is in their best interests.

One more consideration

Finally, there are some market watchers who believe the bull case for cannabis in a recession has almost nothing to do with the burgeoning industry being counter-cyclical, recession-proof or recession-resistant. Instead, they assert, the strong performance will be driven by economics, politics, balancing budgets and generating tax revenues.

Scenario: The prohibition remains at the federal level once the next recession hits. The economic downturn acts as a major catalyst for cannabis legalization at the state and federal levels in the U.S. and abroad. Legislatures will feel pressured to take action – and no jurisdiction will want to be left at the starting line as the others race toward to finish line, creating a possible “domino-effect” scenario.

Bottom line

“Recession-proof” is language that doesn’t belong in investment analysis. However, there is ample reason – based upon fundamentals, the track record of similar sectors and other investment considerations – to conclude that selective cannabis companies and public company stocks could, in fact, be “counter-cyclical” or “recession-resistant.” Accordingly, they should be seriously evaluated as investors consider adjusting their portfolio for a possible economic slowdown.

Currently, cannabis is one of the fastest-growing industries in the world, on the way to generating an estimated $146.4 billion by 2025 (according to Grand View Research). The industry is currently in its early-stages, which can mean that even modest investments now could greatly increase in value 5, 10 or 20 years down the road. As the industry finds its footing on a global scale new investment opportunities emerge every day.

Cannabis does carry lingering social stigmas that may keep investors away. Yet the plant itself is only one facet of a diverse industry that includes everything from “plant-touching” companies to “ancillary” businesses that support the cannabis industry. The following are some of the opportunities tribes and other private investor groups are exploring.

Creating Native-owned cultivation, manufacturing and/or retail operations

As the wave of legalization has slowly but steadily swept across the U.S., the unique sovereignty of Tribal nations has created potential for cannabis business opportunities in communities located in states where recreational-use and/or medicinal cannabis has been legalized.

Investments of this type can take many forms, whether focusing on cultivation, manufacturing, or retail, or the development of a vertically-integrated cannabis operation. This path gives the Tribe complete control over the business.

Leasing Tribal land to cannabis cultivators

In many areas of the country, there are far more aspiring cultivators than there are locations where they can grow. As a result, an emerging trend is the rise of cultivation facilities established by real estate groups or private businesses, which are then leased to cannabis cultivators.

A Tribe looking to invest in cannabis could identify open land or create a greenhouse/indoor cultivation facility that can then be leased to cultivators looking for space. This is an ideal option for Tribal leadership that may not want to take on the operational and legal complexities of cultivating cannabis, but can still benefit from an investment supporting the industry.

Private investment opportunities in cannabis

In recent years a number of leading cannabis companies have gone public, primarily on stock exchanges in Canada, and with a select handful of listed on the NYSE and NASDAQ. The best-in-class producers and retailers represent an intriguing option for private investors. Standard due diligence for purchasing shares of a public company apply equally to the cannabis industry.

Additionally, a number of ancillary companies, those serving the cannabis industry through technology, real estate, or other services, have also gone public and represent a potential investment option. A diverse portfolio that includes a balanced mix of “plant-touching” and “ancillary” businesses could be a low-risk entry into the cannabis industry.

Institutional investment opportunities

As a fast-growing global industry, many cannabis companies are actively searching for capital infusions to expand operations, fund research, launch new products, or enter new markets. There is heated competition for both private venture capital investments, and for institutional investments in newly public cannabis and cannabis-related companies.

Tribal leadership can consider establishing, or investing in, a private equity or venture capital firm and act as an incubator for emerging cannabis businesses. Establishing a fund in conjunction with the other options listed previously could produce a robust cannabis portfolio.

Considering hemp and CBD

While cannabis legalization gets headlines, related products like hemp and CBD are quietly establishing themselves as intriguing industries on their own. The path for growing industrial hemp has recently been opened by federal legislation and the uses of the product are endless. Similarly, CBD has launched a holistic medicine craze, is in great demand for a wide variety of products, and can be derived from non-cannabis sources.

If a Tribe chose to explore hemp and CBD as investment opportunity, they could follow any of the paths illustrated previously and swap out cannabis for hemp or CBD.

Finding the investment mix for your Tribe

The options provided above are just a sample of the opportunities available to investors. There are risks involved with any investment, and cannabis’ complex legal status creates further complications. As result, many traditional investors have been slow to move into the space. But for proactive investor groups, now is the time to get an early foothold in what will soon be a multi-billion dollar global industry.

The MGO | ELLO Cannabis Investment Review is the first publication of its kind for the cannabis industry.  Developed in cooperation with PitchBook, the premier data provider for the private and public equity markets, the report offers a wide range of marketplace insights to an industry that is increasingly hungry for data.

The Review examines this generation’s most dynamic industry from a private market perspective, investigating venture capital and private equity trends, and the consolidating M&A deals reshaping the cannabis landscape.

The report finds that venture capital investment in cannabis has soared to new heights, far surpassing last year’s impressive rally, despite federal restrictions on banking and financing. Plus, investment in cannabis reached nearly $1.3 billion before the first half of 2019, exceeding last year’s tally of nearly $1 billion for all of 2018. The report goes on to examine a number key factors influencing cannabis industry growth, including:

• The growing cannabis ecosystem
• Location: The impact of federal, state and local laws on cannabis investments
• How to value cannabis startups
• What’s next in the cannabis industry?

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