Special Purpose Acquisition Companies, or SPACs, are having a moment in the cannabis industry. Last month Subversive Capital used the investment structure to launch a major California operator following several more big deals this year.
WeedWeek recently talked to Joe Crouthers, a Goldman Sachs alum who’s now CEO of Ceres Acquisition Corp., to discuss why pot SPACs make sense right now. He offered a primer on how they work, and discussed his plans for the SPAC Ceres is sponsoring.
This interview has been edited for length and clarity.
WeedWeek: Why do you see SPACs as particularly attractive or relevant in the cannabis space?
Joe Crouthers: If you combine how a SPAC works with a capital constrained industry such as cannabis, they match up very well. Cannabis companies have a hard time raising large amounts of money due to the lack of institutional investors writing larger checks (i.e. $20MM). A lot of cannabis companies need to raise substantial growth capital and/or to make acquisitions and SPACs are a great way to merge multiple companies together to create a more powerful public vehicle. SPACs are also a way for all parties — investors, founders, and current shareholders — to get more comfortable with a public listing and/or being a public company.
SPACs are effectively a public M&A transaction, where you have both the target and sponsor teams come together. The sponsor then has the ability to take some of its top public investors from the SPAC IPO over the wall and discuss the validity of the deal before definitive documents are signed and an announcement is made. This process helps all parties get on the same page and allows proper messaging to occur.
This process is very different than in a traditional IPO, whereby a company files its IPO documents and then does a very public road show “on the other side of the table” from potential investors. Overall this SPAC process can help the target get comfortable with valuation and potentially avoid a lot of the mispricing that can happen in traditional IPOs. A great recent example of this is the DoorDash IPO whereby the stock opened up over 75% higher than where the deal was priced (i.e. where the company sold the stock to the public). As such, DoorDash in theory left a ton of money on the table…
SPAC investors effectively get a “free look” on a transaction. They buy a SPAC IPO, betting on a particular sponsor team such as Ceres but they still have the optionality to make a final decision down the road based on the quality of the transaction brought to market, known as the “de-spac”.
When the investor buyer shares in a SPAC IPO, the money raised pursuant thereto sits in a trust account, earning a treasury like return. It cannot be used by the sponsor for any reason. Once a sponsor team finds a deal and reaches definitive documentation with a target, the deal is subsequently announced to the public. It is at that point, between announcement and closing of the transaction, that the investor can evaluate the deal and choose whether to continue to be a shareholder or exercise their redemption right and get their money back from the trust account.
WW: How did the Subversive deal change the SPAC climate with regards to cannabis?
JC: I don’t know that it’s changed the overall climate very much but it is certainly instructive on how SPACS can be utilized. Public cannabis companies have seen impressive appreciation in the past few months and I think this is just one more example of positive excitement for the industry. Moreover, the recent announcement of the potential Verano deal demonstrates even more how excited public market investors are for good, quality companies.
We believe that this is the perfect time to be opportunistic and all of these public companies should benefit in the long run from an improved public capital structure and the optionality that it brings to fuel growth. Regardless of the short term stock performance of the names mentioned above, they will both be better positioned to compete and grow. And of course there is always the ability to raise additional capital in the future via a secondary stock offering and/or tap the debt markets for what seems to be better pricing vs if you tried to accomplish the same goals as a private entity.
For example, you’ve seen [MSO] AYR, [which recently borrowed $75M on terms the company says are “attractive and non dilutive”] being able to use the public currency to move faster and be more flexible, be able to move into a new state when you see the right opportunities. That’s the biggest thing they’re accomplishing here, and to me, that will put them in a position to be really successful, regardless of what investors think on day one.
2021 should be a big year for cannabis SPACs. There are a handful of us out in the market and when you look at the public strength of companies such as AYR and MSO Columbia Care, which both went public via a SPAC transaction, you can get a better sense of how these deals may work long term for all stakeholders. At the end of the day, that’s what it is really about. It’s about building a solid base and using the public markets to grow in order to accomplish something special in the future.
WW: Tell us about your SPAC. What are your plans?
JC: Ceres Acquisition Corporation went public and began trading in early March. SPACs typically have 18-24 months to complete a transaction and as such, we are still relatively early in our process. So for us, this is a great time to be out in the market. Our focus is simple – find a fantastic business with solid management – whereby our sponsor team and related strategic partners can use its expertise to help fuel growth and create long term shareholder value.
Regardless of the type of business, we are confident that we can create more awareness with consumers to grow that funnel in order to establish a competitive advantage in the marketplace. For example, we partnered with the founders of 72andSunny, one of the pre-eminent ad agencies in the world. Their experience and knowledge will be invaluable to the company we target and merge with. We also have a handful of entertainment firms in our corner that can add some star power and bring to bear some very unique assets.
WW: What’s your investment thesis that we’re going to see play out?
JC: The last couple of years, cannabis has really been about having a reliable supply chain to get products on the shelf. Generally, if you could just get it on the shelf, it would sell. I think what you will see change — and we are seeing it already in states like California — is that the consumer is getting more intelligent and educated about cannabis products and what they are looking for from brands.
Everything may still sell in the short term but as we get closer to the “consumerfication” of cannabis and the industry becomes more like traditional CPG, consumers will want and demand more. This thesis should continue to drive change across the entire ecosystem.
WW: Do you see this as a situation where you need to compete with the other existing operators or is it more about claiming market share and not necessarily butting heads?
JC: I think we are still at a place where there is some room for everyone and from that, the meaningful players will emerge. We obviously have a few very large public and private MSO’s but we aren’t necessarily at the point yet where companies are competing in every market against one another. We certainly will get there, but right now there is still plenty of opportunity for growth and enough work to keep everyone more than 110% busy.
Geography plays a big role in this. I think California is screaming for consolidation, for some pieces to be put together. You have individual distributors, you have individual product makers. As you put some of those things together and start to fill some gaps, there’s a lot of room to do that. I could absolutely see there being several large players in a state like California. Subversive has certainly put themselves in that group now, given this transaction.
WW: What geographies interest you?
JC: I live in Los Angeles so California is certainly a market that we are familiar with and constantly evaluating. As you move east, a handful of states are also intriguing, including but not limited to Michigan, Arizona, Florida, New York, Illinois, Massachusetts, Texas, etc. I would say that geography is probably less of a focus than the actual businesses we evaluate.
We’re looking closely at other characteristics such as the quality of the management team, their vision for the future, and how we can be helpful as a SPAC partner. Geography is a big part of it, certainly, but it’s not the only component for us.
WW: How much are you looking to spend?
JC: We raised $120MM in our SPAC IPO and that capital is currently sitting in trust. This amount of cash, however, does not limit us in what we can “spend”. For example, we can issue a certain amount of new stock and merge with a $1B company. There is also the possibility of raising additional capital via a PIPE, similar to what you may have seen in the Subversive deal. Overall SPACs are a very flexible capital structure so our options are wide open. But, what we have today in trust, is US$120M.