NICI Quick Take
Collective Growth Corporation is a special purpose acquisition corporation (SPAC). Generally speaking, SPACs operate by collecting money from investors and using the funds to acquire the best company it can afford – leading to SPACs often being referred to as “blank-check companies.” Collective Growth, specifically, is seeking to use the funds it has raised to acquire a cannabis company. It will attempt to target United States investment opportunities tied to hemp and CBD.
Collective Growth has not yet entered into any agreements to acquire a cannabis company. But as a stipulation to its IPO, it must complete its business combination by March 2022 – 24 months after filing its initial public offering.
The company raised US$150 million with outstanding warrants that can be exercised for around another US$86 million.
NICI QUICK TAKE:
Given the turmoil in the cannabis industry in the second half of 2019, cannabis firms are looking for alternative ways to responsibly raise capital. For that reason, SPACs are emerging as a viable source of capital for the industry.
THINGS TO WATCH FOR:
- When will Collective Growth announce its acquisition?
- Will it raise any more money?
- Which state in the United States cannabis industry will Collective Growth invest in?
Generally, investors are wary of SPACs as it is riskier to analyze a company that amounts to little more than a large pile of cash. Adding to the risk is the fact that investors do not know what exactly they’re investing in until a combination deal is reached.
But in the cannabis industry, SPACs can buy companies at a lower valuation and use their management’s expertise to help run the new company. In return, the company it buys gets access to the public market without having to undergo multiple financing rounds – which could end up diluting shareholders.
Collective Growth, as a cannabis SPAC, also alleviates some of the risk that comes with not knowing what the end company may look like. Off the bat, you know it will be looking to enter the United States. What’s more, it will be listed on the Nasdaq. That tells investors that the company won’t invest in U.S. plant-touching producers and will likely focus its investments on hemp cultivation for CBD.
Management is an important consideration, especially with these cannabis SPACs. You want a team that will conduct its proper due diligence on valuable assets, unlike plenty of executives of multistate operators that squandered their raises in hasty acquisition sprees.
Collective Growth’s team carries one of the most influential names in the entire industry: Bruce Linton, former CEO of Canopy Growth. After leaving the world’s largest cannabis company – which he built from the ground up – he’s looking to focus his efforts on this new venture. As the head of Canopy in 2019, Linton funneled hundreds of millions of dollars into Canopy’s United States hemp production, starting with a $150 million investment to process and produce hemp in New York after securing a license in the state. Reflecting his own desires to begin cannabis extraction and processing outside of Canada, Linton will now provide his new company with unprecedented access to assets across the industry, after building up an extensive network to identify target businesses from prior and ongoing due diligence efforts.
Linton’s team at Collective Growth also includes veterans from Canopy Growth like Geoffrey Whaling, President at Collective Growth and four-year strategic advisor to the Canopy. Whaling also currently serves as President of the National Hemp Association, which fortifies the credibility of Collective Growth’s attempt to enter the hemp industry. Collective hasn’t announced any targets for acquisitions yet, but based on Linton and Whaling’s heavy association with the hemp industry, acquiring assets on the hemp cultivation side is a distinct possibility. This team has proven it’s dedicated to the long-term outlook for CBD and its potential yield, and putting their money where there mouths are reflects the intent to invest in research and development efforts over time and reap the rewards.
Tim Saunders, the former four-year Chief Financial Officer of Canopy, wraps up this powerful trifecta. Like Linton, Saunders was eventually replaced in May 2019 by veterans of Constellation Brands in the company’s efforts to take more control within Canopy, but produced outstanding results in his time there. Before Saunders came to Canopy, the company had a $90 million market cap with only a single acquisition. Upon his departure he left behind a legacy of 26 acquisitions while overseeing 8 financings that amounted to over $6.2 billion – Canopy now sits around a $5 billion market cap.
Remember, investing in any SPAC is essentially a bet on how well management can execute its business plan, given their similar structures and large cash dispositions. All of the above signals an experienced team and cannabis sponsor, which is crucial – investing in an SPAC is essentially a bet on how well management can execute its business plan given their similar structures and large cash dispositions.
Collective Growth’s business structure allows for rapid deployment of capital that can be used to scoop up public and private assets at a discounted price. These can come from distressed asset sales by companies looking for an exit opportunity or simply at a bargain that’s too good of a deal to pass up. However, as an SPAC that has not announced its business combination yet, Collective Growth is little more than a pile of cash that will soon be diluted by an acquisition. That said, its price also reflects investor confidence in its management and the amount of money it promises to refund if its promises are not met.
The company has approximately $150 million of cash held in escrow.
As an SPAC, this company will not have revenues until it puts its cash to use, therefore there is no EBITDA or revenue amount thus far.