AYR Wellness and the Art of the Deal

The Amazing Growth of a Small $125 Million SPAC

Special Purpose Acquisition Corporations or SPACs have a bad rap. Perverse incentives, sky high valuations and absurd business plans are common. But the purpose of a SPAC structure can actually be helpful, especially in a capital constrained industry like cannabis. Considering the dearth of funding options in cannabis, SPAC structures are super helpful to solve the capital needs of fast growing companies.

In May of 2019, Jonathan Sandelman’s SPAC, Cannabis Strategies Acquisition Corporation, closed 5 small transactions and became AYR Strategies (now named AYR Wellness, OTC ticker: AYRWF). I wrote about the company in 2019 highlighting the opportunity when the stock was close to $16 per share. 

Fast forward to the present and I’m amazed at how far the company has come in two short years. This little $125 million SPAC is now at a $110 million in EBITDA annualized run rate and is forecasting $800 million revenue and $300 million in EBITDA for 2022. Remarkably, the company now employs 1,700 people. What I love even more about the most recent announcements is that it is clear the company is not slowing down but is accelerating their growth and investments. 

One would think with such a track record that AYR would be trading at some outlandish multiple of revenue and cash flow, especially since the company on a net basis barely has any debt. You would be mistaken, because, hey, this is a US cannabis company with a limited investor base given the weird dichotomy between state and federal legality.

AYR trades at 2.5 times 2022 revenue and 7 times 2022 EBITDA estimates. And the company is growing at over 100% year over year! In 2023, the company should easily top $1 billion in revenue and possibly more than $400 million in cash flow, making its 2023 multiple a silly 5 times cash flow. 

The opportunity for AYR to continue to roll up smaller operators, dispensaries and licenses is about as good as it gets. Why? Because in the capital constrained US cannabis market, AYR can use its size, scale and access to capital to buy smaller companies and continue to grow. It is buying sub-scale companies at 5 times EBITDA that with the growth and access to capital is actually like 2-3 times a few years out. What is even more amazing is that to grow faster, AYR can tap into the debt markets, thus fueling incredible shareholder value creation.

What I love most about following AYR is how disciplined they are when buying companies and using shareholder capital. CEO Jonathan Sandelman and Head of Strategy and M&A Jamie Mendola have put together a string of deals that have brilliantly grown the company’s scale and geographic footprint. Their Liberty Health acquisition was simply inspired. They were able to buy a substantial operation in Florida that was being completely mismanaged. 

And while they have been very active acquiring companies, they have also done a bang-up job integrating these acquisitions as well, as evidenced by their financial performance. It would be a mistake to not mention the amazing work of COO Jen Drake in this regard as well. 

The stock in the past year has more than doubled despite a pullback from highs along with the rest of the cannabis sector. But it hasn’t been an easy ride straight up. As I have written before, the stock initially went up in 2019 and then plunged from $18 to $4.50 before soaring to over $30. And AYR is still a wonderful investment at today’s valuation.

Considering the acumen and demonstrated performance of Sandelman and his team, it is not only confusing why AYR still sells for such a low valuation, but it is also baffling why investors are not more optimistic about the merger of his second SPAC, Mercer Park Brands and Glass House Brands (OTC: GLASF). 

I have written about Glass House and interviewed its President Graham Farrar and am quite optimistic about the long-term future, even though the stock has done poorly in the short run. With the acquisition of the state-of-the art unicorn of a greenhouse about to close, a wide open opportunity to grow its vertical footprint in California and an all-star like Jamie Mendola now on the Glass House board, Glass House’s recent stock price weakness feels eerily similar to the post-SPAC trading in AYR. From the bottom, AYR’s stock increased more than 6 times and its warrants soared 20 times. 

I’m convinced that in the long run, Glass House’s operations will be a prized asset, especially to anyone who wants size and scale and the ability to create brands with a consistent high quality supply chain. The news that Canadian cannabis giant Tilray (NASDAQ: TLRY) is investing in perennial poor performer Medmen at more than twice the valuation of the best run US cannabis companies should be an eye opener for investors ignoring Glass House.

With disciplined operators and the advantage of now being public, I think Glass House’s stock and warrants (that don’t expire for five years) are very compelling. 

And I wouldn’t at all be surprised if down the road, AYR and Glass House made a deal to merge the two companies together. It would be the capstone to a wonderful track record and would create a national super power in cannabis. 

Regardless of whether this happens, it sure will be fun to watch what Jonathan Sandelman and Jamie Mendola’s next moves are. With an aggressive approach and a disciplined strategy, AYR is set to not only become a Tier 1 player in US cannabis, but also create enormous value for shareholders.