This PSPC Has Just Acquired Jay-Z’s Cannabis Company: Should You Buy?
Could this be the year legal cannabis becomes a reality nationwide? It certainly could be. After Democrats take over the White House and both houses of Congress, many expect the cannabis ban to be rolled back somewhat in the new administration.
Once cannabis is legalized, how will competitors differentiate themselves? State regulations and limited licenses allowed some pioneers to occupy a protected position in some states, but if and when the ban ends, competitive fervor may intensify.
In one of the most competitive states in the country, California, a new SPAC backed by hip-hop mogul Jay-Z is betting big on celebrities and brand influencers to differentiate themselves. But will this bold strategy work?
Subversive Capital Acquisition Corp. becomes the parent company
Subversive Capital Acquisition Corp (OTC: SBVC.F), a PSPC that initially raised funds in 2019, has just acquired two large California companies in a bold attempt to consolidate California’s large but unwieldy cannabis market. The two acquisitions were Caliva, a vertically integrated CA operator associated with Jay-Z, and Left Coast Ventures, another large vertically integrated operator.
Subversive Acquisition initially raised $ 575 million in July 2019. Following the two transactions and a few limited buybacks, it will change its name to “The Parent Company” or TPCO Holdings, and will have approximately $ 381 million with which to work, according to management.
I don’t know exactly where that $ 200 million went, as management maintains that there have been “limited buybacks”. These could have gone to the sponsors of SPAC, as well as some individual Caliva / LCV shareholders who are expected to receive part of their buyout in cash, although most will receive shares in the new company.
Is the parent company therefore the Magna Carta Holy Grail cannabis companies, or should you have Reasonable doubt about this publicized property Cannabis SPAC?
The plan for success
The parent company is ambitiously aiming to capture the world’s largest cannabis market. Analysts estimate the California cannabis market will reach $ 3.6 billion in sales this year, rising to $ 7.4 billion by 2025.
Now full of liquidity, the company aims to consolidate an extremely fragmented market. It will put forward its famous investors and spokespersons to do so. Management Notes in the prospectus California has 6,061 growers, 1,159 distributors, 892 manufacturers, 705 retailers and 313 delivery licenses. However, only 20 brands have more than 1% of the market share, with the top 10 brands representing only 30% of the market. The parent company believes it will continue to acquire smaller companies in the future to gain momentum.
In 2019, Caliva partnered with Jay-Z, creating a joint venture at 50-50 OG Enterprises. OG will manufacture and market Jay-Z’s premium cannabis brand Monogram, which just debuted in retail stores in December. Jay-Z also has a 10-year contract as the visionary director of the company. Artists from her Roc Nation label will also provide “strategic and promotional services” for Caliva and her family of brands. This will likely mean promotions at concerts, events, or social media channels. In fact, Roc Nation artists Rihanna, Yo Gotti, and Meek Mill all participated in a recent follow-up private placement in November, buying into The Parent Company and putting their own skin in the game.
In order not to be outdone, LCV licenses certain brands for its own portfolio, in particular Marley Natural of the Marley family, Mind your head Mickey Hart from Grateful Dead, and Mirayo by Carlos Santana. Additionally, LCV also owns seven other brands of CBD infused flowers, vapes, edibles, and drinks.
Another way for The Parent Company to differentiate itself and attract customers: The company pledges $ 10 million to a new social equity fund to support minority-owned businesses, “with the aim of support efforts to dismantle structural racism in American business. ” The company has also committed to contribute 2% of its annual net income to the fund in the future.
The parent company hopes to win through superior branding and marketing through its renowned artists, while bringing other players together and realizing inordinate economies of scale in the world’s largest cannabis market. Obviously, the parent company’s strategy is to go big or come home.
Men lie, women lie, not the numbers
There is no doubt that the benefits of The Parent Company are exciting. However, investors should also consider several important risks:
1. California is a tough market: Much like Canada, California has become somewhat notorious for making life difficult for legal cannabis companies. Obstacles include onerous regulations, slow approvals, expensive infrastructure, localities that have banned the sale of cannabis in some areas, and high sales taxes that have enabled a large illicit market, which some analysts say amounts to nearly 30% of all cannabis sales as is. In fact, of the many successful US multi-state operators today, most have avoided California altogether, or have little presence there, despite California being the country’s largest cannabis market.
Of course, this could be an opportunity. If smaller players fall apart, it could open up market share or acquisition targets for large, well-funded players like The Parent Co. Nonetheless, investors should be aware that the company will operate in one. the most competitive and difficult legal markets in the country. is.
2. Low gross margins: California’s competitive nature is reflected in the combined company margins, which are low and still generate large operating losses. Although the combined companies saw a sizable revenue of $ 148.4 million in the first nine months of 2020, gross margins were only 20%, well below other cannabis companies operating in friendlier states. Operating losses were $ 29.3 million and net losses were $ 54.3 million.
Still, to the parent company’s credit, this is a marked improvement over its performance for the full year 2019, where it achieved a combined revenue of $ 107.2 million, gross margins by 10.6%, operating losses of $ 91.5 million and net losses of $ 165.3 million.
So the good news is that before the merger, the company was already improving. The bad news? It is still a difficult and competitive market.
3. Celebrities get paid; shareholders? Finally, another concern is that not all celebrity influence is free. Jay-Z himself will do quite well, receiving shares through his 50% stake in Monogram JV OG Enterprises, and he will also receive three million shares up front for the 10-year brand deal, with the potential to earn a million more shares. on the basis of certain obstacles to the appreciation of the share price. Meanwhile, Roc Nation will receive $ 25 million in inventory up front, with another $ 7.5 million in inventory each for the next two years under its own three-year deal.
The terms of the licensing agreements for LCV deals with the Marley family, Mickey Hart and Carlos Santana are not being disclosed, but one can imagine they will dig into the company’s margins as well.
Can TPCO turn a two into four, a four into eight?
There is no doubt that The Parent Co.’s perks are enticing. The biggest celebrities are coming together to promote their cannabis line in the world’s largest market, with the funding to support it. However, investors should be aware that the new company is a risky proposition, its famous sponsors are getting plenty of stock just to lend their time and name, and the California market is perhaps the hardest in the country to make a profit.
In this case, I certainly wouldn’t put a large portion of your portfolio or even the majority of your cannabis stock allocation in The Parent Co. However, TPCO Holdings would be a nice speculative addition to a basket of several US cannabis stocks. , which is probably the best approach to play the end of pot ban.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.