Exclusive Interview with TCPO Holdings CEO Steve Allan
Special purpose acquisition company Subversive Capital Acquisition Corp. (NEO: SVC.A.U) (OTCQX: SBVCF) was formed with the intention of consolidating the fragmented California cannabis market. Through a transaction set to close in early January, Caliva, Left Coast Ventures and Roc Nation will form TPCO Holding Corp. (The Parent Company). Steve Allan, President and CFO of Caliva, is set to become CEO of the new company. He spoke with New Cannabis Ventures about the pending transaction and how the resultant company will dominate in the California market.
Prior to entering the cannabis industry, Allan spent about a decade working at Silicon Valley Bank. He worked on an innovation-focused committee and actually researched cannabis. During that time, he met the Caliva team. In 2017, he jumped at the opportunity to join the Caliva team.
Caliva first spoke with the Subversive Capital team more than a year ago, when it was in the process of raising its Series B. The two companies had a similar vision, but lost touch following the onset of the COVID-19 pandemic, according to Allan. Over the summer, they reconnected and the Caliva team had the chance to see the potential synergy with Left Coast Ventures and its assets, as well as with Subversive Capital and its shareholder base.
While SPAC transactions are often looked at as exit events, Caliva is viewing this transaction as more of another funding event, according to Allan.
Talent at The Parent Company
The leadership team at The Parent Company is drawing on talent from the assets it is combining. While Allan is stepping in as CEO of the new entity, Caliva CEO Dennis O’Malley is moving into the COO role. This move is about placing people in the best possible positions to maximize their skills. As COO, O’Malley will continue to use his strategic vision to run Caliva, and Allan will focus on investor relations, fundraising and building support services.
Shawn “JAY-Z” Carter will serve as Chief Visionary Officer of the company, while Caliva leaders Steve Winchell and Drew Kornreich will step into roles at The Parent Company as well. Winchell, Vice President of Product Innovation with Caliva, will use his CPG experience to lead product innovation at the new company. Caliva’s Chief M&A Officer Drew Kornreich will also bring his experience to The Parent Company. Allan also highlighted John Figueiredo, CEO of Left Coast Ventures asset Sisu. As a leader of this oil distillation company, Figueiredo will play a key role in the company’s supply chain and product development.
Carol Bartz, the Chairman of the Board for Caliva, will step into the same role on The Parent Company’s board. Other key members of the board will include Tuatara Capital Partner Al Foreman, Director of NetApp and Barracuda Jeffry Allen and CEO of Roc Nation Desiree Perez.
The California Opportunity
The California cannabis market is fragmented with no clear winners. The top 10 operators in the state have less than 30 percent market share, according to Allan. Subversive Capital is forming The Parent Company with the intention of creating this market’s clear winner.
Caliva and Left Coast Ventures have spent $300 million building the infrastructure for a scalable platform. Additionally, Caliva has spent years building an ERP system to run its business and developing its direct to consumer platform. With the combined vertically integrated operations, The Parent Company is in a strong position to be the leading CPG operator in the California cannabis market.
SPAC deals traditionally have a large cash component, according to Allan. This transaction, set to close in January 2021, aims to align with investor success. Caliva, Left Coast Ventures and JAY-Z took a portion of their compensation as earnouts. As a part of the transaction, Caliva did buyout JAY-Z’s ownership in the 50-50 joint venture previously formed. The only use of cash in the transaction was to pay off costs associated with a Left Coast Ventures acquisition being completed within the next week and to pay off working lines of credit for both Caliva and Left Coast Ventures, according to Allan. The transaction is designed to rerate once it closes.
The company is taking the long-term view that cannabis will become legal in the United States. When it does, The Parent Company will have the opportunity to move from a Canadian exchange to a U.S. exchange, which will open up another rerating opportunity for its stock, according to Allan.
Once the transaction closes, The Parent Company will have a leading footprint and market share in California, according to Allan. The company will have premium indoor cultivation capable of producing 8,000 to 12,000 pounds of cannabis, a 500-plus farm procurement network and seven manufacturing facilities. At full capacity, the company could meet 20 percent of the California market’s demand. The Parent Company also has five distribution hubs, products in almost 500 retail stores, 17 brands and 250 SKUs across all major categories.
Additionally, Caliva’s direct-to-consumer platform covers approximately 51 percent of the state’s population. As The Parent Company executes its plan, it intends to cover 88 percent of the population. The company plans to go from six locations to 22. Over the next 12 to 18 months, the company is aiming to become the top play across the California market’s major product categories.
The Parent Company has a strong foundational base with the capability to grow organically. It has no significant gaps that must be solved with M&A, which means it can take a more opportunistic and disciplined approach to exploring potential deals.
With such large vertical operations, The Parent Company can solve a lot of challenges for potential acquisitions, according to Allan. For example, it could offtake the product from a large scale cultivator and put it into its branded products.
The top priority for the company will be exploring the retail delivery space. It is considering cannabis deserts, areas where licenses have yet to be awarded, and the potential to enter those areas via acquisition.
Whenever considering a growth opportunity, the company will conduct a build versus buy analysis to determine what makes the most sense. With the combined experience of Subversive Capital, Caliva and Left Coast Ventures, The Parent Company has a lot of relationships in the industry. Allan expects the company will have announcements about a number of business combinations in 2021.
While M&A is a part of the company’s strategy, it does not plan to take a traditional MSO approach. Initially, The Parent Company will focus on California, and when it does look to other markets, it plans to take an asset-light approach. The team is anticipating the end of prohibition sometime within the next 12 to 24 months, which means it does not find the idea of building identical, redundant assets across multiple states appealing. Rather, it will likely use its technology, formulations, brands and marketing power to enter new markets via licensing partnerships.
The Parent Company’s relationship with JAY-Z and Roc Nation gives it a competitive edge when it comes to marketing through name recognition. Additionally, JAY-Z brings his experience in premium and ultra-premium product categories, which the company can leverage as it grows.
While the initial focus will be on California, the company is also interested in the East Coast. Brands are often developed on the coasts, and the relationship with JAY-Z and Roc Nation could help expand the company’s brand footprint to markets like New York and New Jersey.
The Subversive Balance Sheet
Subversive Capital has $575 million in trust, the largest balance sheet in the U.S. cannabis industry, according to Allan. The completion of regulatory reviews will trigger a redemption period, in which investors have the option to stay or go. Thus far feedback on the opportunity and pricing of the deal has been positive, and the company hopes to maintain a significant amount on its balance sheet when it exits the qualifying transaction in January, according to Allan.
In 2020, Caliva and Left Coast Ventures are anticipating approximately $185 million in revenue in 2020: $42 to $43 million in the B2C category, $43 to $44 million in the branded wholesale category and approximately $100 million in bulk wholesale. In 2021, Caliva and Left Coast Ventures are anticipating $334 million in pro forma revenues.
The Parent Company’s growth opportunities lie in offtaking product from bulk wholesale and producing more wholesale branded products that it can push through the distribution capabilities of Caliva and Left Coast Ventures. The company also sees an opportunity in expanding its retail and delivery capabilities.
Historically, Caliva and Left Coast Ventures have largely focused on middle-of-the-shelf products. But, The Parent Company is looking to sell across the entire shelf. The relationship with JAY-Z opens the door to the premium and ultra-premium categories, while Left Coast Ventures assets like Sisu offer low-cost materials that could help the company compete in the value product segment.
In addition to bringing brand power to the table, JAY-Z will be leading The Parent Company Social Equity Ventures. The fund, initially set at $10 million, will help provide early-stage capital for Black and minority entrepreneurs. This initiative will also help accelerate these businesses with resources and expertise.
Integration and the Future
M&A always presents integration challenges, but The Parent Company has built a team to tackle those challenges. Caliva and Left Coast Ventures are complementary assets, and any deals the company pursues in the future will take into consideration the culture of the people and how to maximize their value. Allan is excited about the growing political support for the industry, and the company will continue to execute as it moves forward from its strong starting point in the California market.
To learn more, visit the Subversive Capital website. Listen to the entire interview: