Viridian Capital Advisors Believes Canopy Growth Remains Overvalued Against Select MSOS
The graph shows the consensus operating estimates for the calendar year ended 12/31/23 and Viridian Capital Advisors estimates of current net debt and enterprise value for Ayr Wellness (CNSX: AYR.A, OTCMKTS: AYRWF) and Canopy Growth (TSX: WEED) (NASDAQ: CGC).
Both companies’ debt is trading at stressed/distressed levels
- AYR’s 12.5% notes due 12/10/24 have traded as low as 56.5% of par to yield around 65%.
- Canopy’s Supreme Cannabis 8% notes due 9/15/25 traded as low as 61% of par to yield close to 30% in December 2022. The company’s Sr. Secured Term loan was recently quoted at 81.
Both companies have upcoming liquidity challenges
- AYR has relatively manageable debt maturities in 2023, but its $110M 12.5% notes maturity in December 2024 is problematic. The company has significant time to deal with refinancing, and at some time in the next 18 months, the capital markets will likely be more hospitable. The problem, however, is the sheer size of the required refinancing, representing over 100% of the company’s current market cap.
- Canopy Growth has approximately US$ 249M of unsecured notes that mature on 7/15/23. The company currently has about $592M of cash, a negative free cash flow of around $50M per quarter, and a $100M minimum liquidity covenant in its senior debt. At its current run rate, this spells potential trouble by year-end 2023. Canopy’s net debt of $298M represents only about 20% of enterprise value giving the company flexibility to do debt/equity swaps and other financial engineering to produce liquidity, at least for the next twelve months.
The market is valuing the companies very differently, and AYR seems relatively undervalued
- AYR is trading at EV/2023 Revenues and EV/2023 EBITDA of .92x and 3.94x, respectively, well below its peer group.
- Canopy is trading at EV/ 2023 Revenues of 4.57x, and Projected EBITDA is negative $169M. We find it difficult to support this valuation.
AYR is the classic distressed asset situation: a good company with solid assets and positive EBITDA. It’s a bit over-levered and has looming liquidity problems, but it seems like a situation begging for creative financial solutions.
Canopy Growth faces a far more complex problem. It’s been traveling the road to insolvency for years with no signs of a turnaround. Consensus estimates show over $700M of negative cash flow from operations over the next four years, significantly more than the company’s remaining cash. Sooner or later, Canopy’s ability to dilute its shareholders to fund itself will be exhausted, and it will start to hit bank covenants before then. The problem will be restructuring a negative cash flow company; we all know how well that works.
The Viridian Capital Chart of the Week highlights key investment, valuation and M&A trends taken from the Viridian Cannabis Deal Tracker.
The Viridian Cannabis Deal Tracker provides the market intelligence that cannabis companies, investors, and acquirers utilize to make informed decisions regarding capital allocation and M&A strategy. The Deal Tracker is a proprietary information service that monitors capital raise and M&A activity in the legal cannabis, CBD, and psychedelics industries. Each week the Tracker aggregates and analyzes all closed deals and segments each according to key metrics:
- Deals by Industry Sector (To track the flow of capital and M&A Deals by one of 12 Sectors – from Cultivation to Brands to Software)
- Deal Structure (Equity/Debt for Capital Raises, Cash/Stock/Earnout for M&A) Status of the company announcing the transaction (Public vs. Private)
- Principals to the Transaction (Issuer/Investor/Lender/Acquirer) Key deal terms (Pricing and Valuation)
- Key Deal Terms (Deal Size, Valuation, Pricing, Warrants, Cost of Capital)
- Deals by Location of Issuer/Buyer/Seller (To Track the Flow of Capital and M&A Deals by State and Country)
- Credit Ratings (Leverage and Liquidity Ratios)
Since its inception in 2015, the Viridian Cannabis Deal Tracker has tracked and analyzed more than 2,500 capital raises and 1,000 M&A transactions totaling over $50 billion in aggregate value.
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