California weed supplier HERBL in talks to go public via SPAC merger - sources

(Reuters) -California weed supplier HERBL is in talks to go public by merging with blank check company BGP Acquisition, at a valuation of about $600 million, sources familiar with the matter said, one of several U.S. cannabis companies tapping funds in anticipation of potential federal reforms.

Santa-Barbara, California-based HERBL, has seen its post-merger enterprise value cut to between $450 million and $500 million in recent weeks, from over $630 million in the original agreement reached with BGP around June, the sources said.

That would translate to an equity valuation of about $600 million, down from around $800 million in the previous agreement, they added.

BGP, a Special Purpose Acquisition Company (SPAC) formed by former Goldman Sachs banker Ruth Epstein, has been trying to raise roughly $50 million from investors as part of a so-called public investment in private equity (PIPE) round, they added.

But it has been challenging for BGP to raise the money it needs to fund the deal at a high valuation, the sources said, so deal terms have been renegotiated to make them more attractive to potential investors.

By merging with BGP, HERBL’s shares will be listed on the NEO exchange in Canada, a country in which it does not do any business. Companies that grow or sell marijuana in the United States or are otherwise “plant-touching” cannot list their stocks on premier U.S. exchanges, which has limited their access to capital.

A PIPE is a funding round that typically goes hand-in-hand with a SPAC merger and helps provide necessary financing for such deals.

In recent months, SPAC sponsors have found it tougher to raise PIPEs to support deals, as the investor euphoria fueling the SPAC boom has subsided due to poor trading performance of several companies that went public through such deals.

The sources cautioned it remained uncertain whether BGP will raise the PIPE funding it is seeking or complete the deal, and HERBL might decide to stay private.

HERBL declined to comment. BGP did not respond to requests for comment. Sources declined to be identified because the discussions are confidential.

Rising demand during coronavirus-related lockdowns and Democrats’ promises to reform marijuana laws have raised the drug’s popularity, leading to a surge in cannabis-focused deals. Nine SPACs have done deals worth $5.4 billion so far to take cannabis-focused companies public.

Marijuana remains illegal under U.S. federal law, making it harder for weed companies there to get investor support.

The AdvisorShares Pure U.S. cannabis ETF, which tracks shares of only the U.S. cannabis companies, is down 1% this year, while the global cannabis stocks tracker MJ ETF is up 24.5%.

HERBL, a distributor and supply chain services provider led by former United Natural Foods Inc President Mike Beaudry, took over Nevada-focused rival Blackbird in June, expanding its client base to around 98% of retail outlets in both states.

Its sales grew almost 150% last year to $264 million and it is projecting over 35% topline growth this year, according to documents seen by Reuters. The company broke even on an adjusted core earnings basis in 2020 and expects to report a $10 million profit this year.

Reporting by Shariq Khan and Anirban Sen in BengaluruEditing by Denny Thomas and David Gregorio