Finally, a SPAC Merger That’s Got a Shot at Success

Fortune recently discussed the downfall of the SPAC (special purpose acquisition companies), those blank-check IPOs that raise billions of investor capital so they can go out and find a target business to merge with.

As Fortune points out, the biggest single issue facing SPACs today is that redemption rates have shot up in the last few months. This means that the operating company will get less cash from the SPAC upon merger. In this instance, cash is king.

Worse still, if redemptions are higher due to more SPAC investors balking at mergers, the fees associated with those mergers don’t change. That leaves the target company less than enthused about its choice to go public.  

So, what’s a company to do.

A Feb. 14 merger announcement from Northern Lights Acquisition Corp. (NASDAQ:NLIT) could provide the answer.

Here’s why.

Safe Harbor to the Rescue
On Feb. 14, Northern lights announced that it would acquire SHF, LLC for $185 million. Safe Harbor Financial is an operating business, which is owned by Partner Colorado Credit Union, a member-owned, not-for-profit cooperative.

Safe Harbor provides banking solutions to cannabis-related businesses (CRBs) in the U.S. and Canada. It got its start in 2015, launched out-of-state accounts a couple of years later, and in 2020, established a cannabis lending program.

Safe Harbor CEO Sundie Seefried first created a cannabis banking system in 2014 while pondering whether to retire from her day job as CEO of the credit union, a position she held for 20 years until moving to Safe Harbor full time in July 2021.

Lawyers kept asking her why her credit union couldn’t service their marijuana business clients. The more she looked into the answers, the more she realized that the banking industry wasn’t giving the cannabis industry proper advice.

Seefried decided to do something about it. Today, Safe Harbor has more than 550 accounts, up 55x from 10 accounts in 2015. Its deposits have grown from $153 million in 2015 to $4.09 billion in 2021.

In addition to operating a cannabis banking business, it also licenses its cannabis-related services to other financial institutions. It’s a potent one-two punch.

Cannabis has taken a lot of hits in the past couple of years, but the reality is that it’s a growing industry that will continue to require the services that Safe Harbor provides.

For example, there are estimated to be more than 70,000 CRBs in the existing cannabis market in the U.S. Even the most conservative estimates would expect that to grow tremendously over the next few years. So for sure, federal legalization would be the cherry on top of the cake.

Sales themselves are estimated to grow by 14% annually through 2025 for medical cannabis and 20% per year for adult use. As a result, total sales are projected to exceed $45 billion by 2025.

While it hasn’t been easy, I don’t think there’s much doubt that the cannabis industry will continue to grow in influence over the next 5-10 years.

Northern Lights Has a Role to Play

Most SPAC mergers see the sponsors slowly fade into the background, selling out as soon as the price is right. Northern Lights appears to be an outlier. It could play a significant role in Safe Harbor’s future success.

First, the people behind Northern Lights’ sponsor have a considerable amount of cannabis industry experience through their work at Luminous Capital, a private equity firm with offices in New York, Toronto, and Denver.    

While Safe Harbor’s managed to build an actionable loan pipeline of more than $300 million since launching its commercial cannabis lending platform in late 2021, some of that pipeline -- approximately $124 million -- comes from Luminous Capital’s origination. 
So, not only does Luminous bring loan volumes to the table, but through its affiliation with Northern Lights, the de-SPAC separating Safe Harbor from the credit union improves Safe Harbor’s growth capabilities.

For example, Safe Harbor has balance sheet maximum loan limits that it has to live by in its existing relationship with Partner Colorado. However, as an independent publicly-traded company, it will have much greater flexibility in its balance sheet and lending programs.

Post-merger, Northern Lights shareholders (assuming no redemptions) and NLIT Sponsor (the folks from Luminous) will own 46.3% of the combined entity. The PIPE (private investment in public equity) investors will own 18.5%, and Partner Colorado will own 35.2%.

Northern Lights’ Co-CEO’s said the following about Safe Harbor in its press release:

“Safe Harbor is the most compelling investment opportunity we have encountered in the cannabis industry as both operators and investors. Safe Harbor is one of the only multi-state financial service organizations to successfully navigate the highly regulated cannabis banking industry, providing services that operators in other industries take for granted,” noted John Darwin and Joshua Mann, Co-CEOs of Northern Lights.

Safe Harbor will begin life as a public company with $100 million in cash on its balance sheet and an equity value of $327 million. More importantly, the two merger partners will be equal partners in the truest sense of the word. Not many SPACs can make that claim.

It’s not a slam dunk by any means. However, if you’re into cannabis, this could be an attractive “fun money” bet.