"Shakespeare was a man who wrote poetry. I'm a man who writes poetry. Why not compare yourself to the best?" -Shawn "JAY-Z" Carter
We are bullish on several names in the Cannabis space. There is an abundance of creative energy coming into the space and some interesting new business models. As a result, we are adding SBVCF to the Hedgeye Cannabis LONG Bias list. Subversive Capital Acquisition Corp. (OTCQX: SBVCF) yesterday announced it has entered into definitive transaction agreements with MONOGRAM founder Shawn "JAY-Z" Carter, Roc Nation, CMG Partners Inc. (Caliva), and Left Coast Ventures, Inc. (Left Coast Ventures), to form TPCO Holding Corp., the largest cannabis SPAC with a mission to both consolidate the California cannabis market and create an "impactful" global company. While we have significant work to do on the business model, out of the gate, the company and its brands will capture considerable attention in the California market, the largest and most mature in the US. The maturity of legal statutes of the California market poses some challenges that need to be considered, but companies like Columbia Care (CCHWF) are doing well in the market.
In acquiring Caliva and Left Coast Ventures, TPCO has created a vertically integrated single-state operator projected to reach $185 million in revenues in 2020. Bulk wholesale is expected to make up 53.5% of 2020 revenues, while branded wholesale is expected at 23.8% and retail/delivery at 22.8%. However, by 2022, the company projects a sales mix shift that elevates delivery to 40.9% share, with retail comprising 17.7% and combines wholesale at 41.4%. TPCO estimates revenues of $334 million for next year's revenues, an 81% YoY increase. The company currently sits on $575 million in cash-in trust and plans on consolidating the highly fragmented California market through M&A and expanding its omnichannel platform. In addition to heavily leveraging its celebrity attachment with Jay-Z to increase brand awareness and recognition, the company has made social equity a key part of their brand. Jay-Z is expected to lead its initiative to raise $10 million to invest in minority-owned and Black-owned cannabis companies. TPCO has slated at least 2% of its net annual income to support social equity initiatives.
STRONG TRENDS IN THE CA MARKET
TPCO HOLDINGS INVESTMENT SUMMARY AND OUR INITIAL THOUGHTS.
ESTABLISHED BUSINESSES
TPCO Holdings is a merger of two California operators, Caliva and Left Coast Ventures, which will create a fully vertically integrated platform with cultivation, manufacturing, brands, retail, and delivery to support further brand development and an aggressive M&A strategy. Caliva and Left Coast Ventures expect combined pro forma revenues of $185 million in 2020 and $334 million in 2021 (these acquisitions together constitute SCAC's "qualifying transaction.")
HEDGEYE: California is the oldest and most mature Cannabis market in the US. Adult-use sales grew 17% in October and are now running at a $4.1 billion annualized run rate. Regulations in the state also make operating in the state expensive for most small operators. On the surface, rolling up the CA market is an interesting business proposition.
PROGRESSIVE OPERATIONAL PLATFORM
Both Caliva’s and Left Coast Ventures’ California roots will allow them to own their supply chain, enabling the company to leverage scale and profitably produce and distribute a broad portfolio of cannabis products across different form factors. "The vertically integrated, omnichannel strategy is designed to maximize gross profit and EBITDA margins, scale consumer reach, generate proprietary consumer data, and beat the illicit market on price, quality, and convenience."
HEDGEYE: We would like to know more about how the company will integrate the two companies.
OMNICHANNEL PLATFORM
Caliva has built and validated a scalable omnichannel business offering customers convenient express or scheduled delivery and in-store or curbside pickup, all through a single user-centric e-commerce platform, Caliva.com. This omnichannel e-commerce platform (offering high-margin owned brands as well as third-party brands) will theoretically allow TPCO to scale its direct-to-consumer reach to all Californians rapidly. Coupled with the powerful sourcing and low-cost manufacturing capabilities at Left Coast Ventures and Caliva, this omnichannel platform will seek to offer consumers across California compelling pricing and convenience while remaining profitable.
HEDGEYE: In July 2019 Jay-Z, took a role with Caliva as a strategist, and we know the impact he is having on that company. I don’t know enough about the economics of cannabis delivery, other than what is in the company presentation.
EXCLUSIVE BRAND PARTNERSHIPS AND LEADING CULTURAL INFLUENCE
McDonald's may have Travis Scott, but TPCO has Jay Z. The company brand strategy and marketing playbook led by Shawn "JAY-Z" Carter and Roc Nation can leverage the unparalleled cultural influence of leading artists and entertainers to build the most valuable and scalable brand IP in cannabis.
HEDGEYE: I’m happy to be riding on the coattails of the “Jay Z” brand for the time being.
UNRIVALED CONSUMER REACH
Caliva currently reaches over 50% of consumers in California through its existing platform for delivery. TPCO is expected to have the most significant consumer reach of any cannabis company in California, reaching 75% of consumers in the state by the end of 2021 and almost 90% by the end of 2022 through scaling of its omnichannel platform.
HEDGEYE: As I said before, if there is some concern about the future of TPCO, it will come from the growth and profitability in the delivery channel. I need to do more work on the economics of Cannabis delivery. The company that has talked delivery publicly is Trulieve, and CEO Kim Rivers has stated that it's not very profitable.
STRONG BALANCE SHEET
SCAC currently holds approximately $575 million in cash-in-trust, which would make TPCO a well-capitalized company in the United States, assuming no redemptions. TPCO expects to pursue an aggressive M&A strategy to accelerate growth, market share gains, and profitability.
HEDGEYE: As a rule of thumb, I would prefer organic growth over a roll-up strategy, but for the time being, TPCO has both. It will be interesting to see how the company positions its roll-up strategy and what type of target companies they are looking for.
INDUSTRY-DEFINING SOCIAL IMPACT
Led by Shawn "JAY-Z" Carter, TPCO will fund The Parent Company Social Equity Ventures with an initial target of $10 million and an annual contribution of at least 2% of its net income to invest in minority-owned and Black-owned cannabis businesses and contribute to the effort to rectify the wrongs of prohibition through initiatives that are working toward meaningful change in the criminal justice system. These initiatives will include bail reform, industry vocational training, job placement, expungement clinics, and Social Equity application support.
HEDGEYE: We need more of this!
MANAGEMENT TEAM
An experienced executive team will lead TPCO with deep knowledge of the combined companies, the cannabis industry, and the consumer-packaged goods, technology, and financial industries. Following the closing of the Transaction, The Parent Company will be led by:
- Steve Allan as CEO
- Brett Cummings as CFO, President of Left Coast Ventures
- Dennis O’Malley as COO, President of Caliva
- Shawn “JAY-Z” Carter as Chief Visionary Officer
HEDGEYE: I don’t know the management team, but I look forward to learning more about the people involved with this transaction.
ABOUT ROC NATION
Roc Nation, founded in 2008 by JAY-Z, has grown into the world's preeminent entertainment company. Roc Nation works in every aspect of modern entertainment, recording artists, producers, songwriters, and more. Roc Nation's client list includes some of the world's most recognizable names in entertainment, from Rihanna and Rapsody to Buju Banton and Snoh Aalegra. Roc Nation is a full-service organization, supporting a diverse roster of talent via artist management, music publishing, touring, production, strategic brand development, and beyond. Roc Nation Sports was founded in 2013, bringing the organization's full-service touch to athletes across the NFL, NBA, MLB, and global soccer.
ABOUT CALIVA
Caliva is a leading single-state cannabis operator in California. Founded in 2015, Caliva's industry advantage comes from its vertical integration and direct-to-consumer platform. This direct-to-consumer experience enables customers to purchase cannabis at Caliva's retail stores and place orders online for in-store pickup or same-day delivery straight to their door. Caliva's plant-based solutions serve over 1 million customers and are designed to fit any lifestyle. Caliva's commitment to compliance and quality reinforce its position as THE MOST TRUSTED NAME IN CANNABIS™.
ABOUT LEFT COAST VENTURES
Headquartered in Santa Rosa, CA, Left Coast Ventures is a diversified cannabis and hemp company specializing in cultivation, extraction, manufacturing, brand development, and distribution. Left Coast Ventures and its subsidiaries are working to shape the future of the legal cannabis industry in the United States through acquisitions, investments, and incubation while building a respected portfolio of top-shelf brands. Wholly owned, licensed, and/or distributed brands within the Left Coast Ventures portfolio include Marley Natural, Mind Your Head by Mickey Hart, Mirayo by Carlos Santana, JEF, SoulSpring, Provault, Chill, Headlight, Get Zen, New Frontier Brewing, and Yummi Karma/High Gorgeous.
VALUATION
We see bot of the Cannabis SPAC's on our LONG bias looks to reasonable valued relative to the opportunities ahead of both companies. Executing the vision is critical to the success of both companies.
