Subversive Capital to Acquire Caliva and Left Coast Ventures in Bid to 'Dominate' California Cannabis Industry

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The consolidation of California’s multibillion-dollar cannabis industry is underway.

New York-based Subversive Capital — which last year raised $575 million through a special-purpose acquisition company (SPAC) and set out to purchase one or more cannabis ventures — announced Tuesday deals for two of California’s most prominent operators: Caliva and Left Coast Ventures.

Those companies, along with a third extraction venture called Sisu and the “Monogram” cannabis brand recently launched by hip-hop mogul Shawn “Jay-Z” Carter and Caliva, will be rolled into a newly formed vertically integrated cannabis firm called “The Parent Company.”

Jay-Z will serve as the company’s “chief visionary officer” and receive $50 million in Subversive Capital Acquisition Corp. (SCAC) stock.

The transactions are mostly stock-based — shareholders of Caliva and Left Coast Ventures will receive newly issued common shares of SCAC — however certain individuals at the two companies will also receive cash, according to a news release.

Upon closing, the Caliva purchase will be worth approximately $282.9 million, while the Left Coast Ventures deal carries a $142.2 million price tag, the release noted.

In an email to THCnet, Subversive Capital advisor Steven Yoo confirmed that Caliva shareholders would receive $10 million in cash and $280 million in SCAC stock. Meanwhile, Left Coast Ventures and Sisu shareholders will receive $30 million in cash and $110 million in SCAC stock.

Additionally, Subversive has signed an exclusive three-year partnership with Jay-Z’s entertainment agency, Roc Nation, and will have “special access” to its roster of artists and athletes. In exchange, Roc Nation will receive $20 million in SCAC shares, Yoo noted.

The deal is expected to close in January 2021.

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Negotiating a mostly stock-based transaction leaves Subversive with a veritable war chest of more than $500 million for future deal-making.

Speaking to THCnet, Subversive Capital founder and chairman Michael Auerbach said the cannabis firm is “building the first 100-year company in cannabis” with a goal to “dominate the cannabis industry in the post-Prohibition era.”

In doing so, Subversive has formed The Parent Company with hopes that it can further consolidate the California cannabis market and soon begin exporting its brands across state lines upon the commencement of legalized interstate commerce.

“One of the reasons we created such a large SPAC is because we would like to roll up the California market,” Auerbach told THCnet. “We have our eyes set on massive M&A activity in 2021.”

Auerbach is bullish on the prospects of federal legalization, and believes cannabis prohibition in the U.S. will come to an end sometime over the next 12 - 24 months. When it does, he plans to transfer the SCAC listing from Canada to an American stock exchange like THE NASDAQ or NYSE.

During a pre-recorded call with members of the Subversive management team, Auerbach said the firm spent “18 months doing our due diligence on over 100 companies across the country.”

“Our research concluded that California is the largest and most fragmented cannabis market, presenting an opportunity for market consolidation and producing the leaders of the post prohibition national cannabis economy,” he said. “We believe that California — with its consumer market, cannabis legacy, talent pool, and experienced operators — is the most strategic place to build a cannabis operation at scale before national expansion. And we are uniquely-positioned to do precisely that with a robust vertically integrated supply and a powerful omnichannel e-commerce platform that can support the most valuable cannabis brand portfolio on Earth.”

Auerbach’s bet is that Subversive’s “brand IP focused, asset-light” business model will eventually give the company a competitive advantage over existing MSOs that have spent hundreds of millions of dollars building indoor cultivation facilities and opening dispensaries in markets where adult-use and medical cannabis has been legalized.

That, of course, hinges on some form of federal legalization and the ability to ship cannabis grown in California to already established markets like Colorado, Illinois and Massachusetts, as well as newly legal markets like Arizona and New Jersey.

“At some point in the next couple of years, I do think interstate commerce will happen, therefore making the MSOs very popular retailers in their state selling my brands,” Auerbach told THCnet.

In the meantime, combining Caliva and Left Coast Ventures will create a “the most robust vertically integrated platform in California” and allow the company to “control the supply chain while maximizing margin,” according to Steve Allan, the former president and CFO of Caliva who will now serve as the CEO of The Parent Company.

“Whether through our own cultivation or 500-plus farm procurement network, we can secure the low-cost, high-quality supply that we need to create high-quality and high-margin products for both the wholesale distribution market and the rapidly expanding direct-to-consumer channel,” he said during the call.

Merging Caliva and Left Coast Ventures gives Subversive a vertically integrated business that is expected to generate $185 million in combined revenue this year through cultivation, manufacturing, retail dispensaries, delivery and several branded products.

During the call, Allan laid out the company’s “five pillar approach” to dominating the California cannabis market, which is projected to be worth $7.4 billion by 2025 and represents 22% of the total legal cannabis sector in the U.S.

Those pillars include controlling the supply chain through vertical integration, delivering products directly to consumers, developing new brands, evolving existing brands and continuing to seek M&A opportunities.

“We plan to aggressively expand market share and profitability via accretive M&A,” Allan said. “We will be uniquely positioned to consolidate the highly fragmented California market, and we know that top operators are ready to combine with the right strategic partner.”

Allan added that the company has already identified several potential targets across the supply chain but noted that Subversive has a particular focus on “retail and delivery, wholesale distribution, large-scale cultivation, and uniquely-branded products.”

According to Allan, The Parent Company will have an anticipated $1.1 billion market cap.

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In addition to its planned consolidation of the California market, The Parent Company is also committing to investing in cannabis startups launched by minority entrepreneurs via its “Social Equity Ventures” division, which will be led by Carter.

An initial $10 million seed investment has been allocated to launch the initiative, and The Parent Company has committed to contributing at least 2% of its net income to minority-owned and Black-owned cannabis businesses.

“As we lead the charge to a more inclusive cannabis industry, we have a one-time opportunity to launch an impactful social equity initiative that is core to our strategy,” Carter said. “As we all know, the toll of the failed war on drugs is a historic example of racial inequity in our society. Although we may not be able to redeem these injustices, we can create a brighter future for everybody through our actions.”

According to the news release, SCAC also received private placement commitments of $36.5 million from Fireman Capital Partners, Tuatara Capital, and Subversive Capital, the largest investors in Caliva and Left Coast Ventures. Roc Nation artists Rihanna, Yo Gatti and Meek Mill also invested.

Additional information is available in the release and in an investor presentation.


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