An $850 Million Deal: Harvest Acquires Verano Holdings To Create The Largest U.S. Cannabis Company

Harvest Health is larger but less well-known than peers like MedMen and Green Thumb.

Summary

Harvest Health (OTCQX:HRVSF) has signed a deal to acquire Verano Holdings for U$850 million in stock, in one of the biggest deals in United States cannabis history.

After the deal, Harvest Health will have operations in 16 states and will have licenses for 123 dispensaries. This is 50% more dispensaries than either MedMen (OTCQB:MMNFF) or Green Thumb (OTCQX:GTBIF), making Harvest Health the largest cannabis company in the United States by dispensary license count.

Harvest Health is also the most valuable cannabis company in the United States when including the shares issued in the Verano Holdings deal. Verano shareholders will control about 30% of Harvest Health, including notable shareholder SOL Global Investments.

Harvest has very aggressive projections for 2019 and 2020. Among other things, Harvest expects to have 70+ dispensaries open by the end of 2019, which would likely take the dispensary crown from current leader Curaleaf (OTCPK:CURLF). Harvest is also forecasting that they might earn $223 million in revenue in 2019 and $559 million in revenue in 2020. The former projection would require sequential revenue growth to average (geometrically) 53% over the next five quarters – a growth rate that Harvest has hit only once in the past six quarters.

While that forecast is very aggressive, purchasing Verano Holdings might be a good first step in achieving those goals.

Who is Harvest Health?

Harvest Health is building a national footprint

 

Source: Harvest Health Filing Statement.

Harvest Health is a large American cannabis company, but is perhaps less-known than more publicized multi-state operators like MedMen or Green Thumb. While the latter two companies have 10,400 and 5,900 followers on Seeking Alpha, only 1,280 people follow Harvest Health on this platform. Despite a small investor following, Harvest is larger than both MedMen and Green Thumb by several metrics, including by dispensary licenses and enterprise value.

Harvest Health has operation in 11 states including Arizona

Source: Harvest Health investor presentation.

Harvest is based in Arizona but has operations in 11 states covering 36% of Americans, even prior to its purchase of Verano Holdings. Harvest is vertically-integrated, eschewing the more specialized business models of Slang Worldwide (OTCPK:SLGWF) and Origin House (OTCQX:ORHOF). This model will allow Harvest to potentially earn better margins in large markets like Florida, where Trulieve (OTCPK:TCNNF) uses the same model to earn 71% gross margins and generate positive cash flow and EBITDA, but a vertically-integrated model may also increase costs in smaller markets where Harvest is not able to open a large store network, given the current illegality of shipping cannabis across state lines.

Harvest has strong revenue growth but is not yet profitable when excluding fair value adjustments

Harvest went public via reverse takeover on Nov 13th. Shares trade on the Canadian Securities Exchange as HARV and over-the-counter in the United States as HRVSF. Due to the recency of this transaction, there is limited historical financial data available, but Harvest has seen solid revenue growth, generating $11.2 million in revenue in the Sep 30th quarter, up 6% QoQ and 62% YoY.

 

Despite revenue growth, Harvest is not yet profitable. While their adjusted EBITDA shows a Q3 profit, that figure includes non-cash fair value adjustments. Without those adjustments, Harvest’s EBITDA was negative for the quarter and Harvest generated an operating cash flow deficit of $2.4 million and a free cash flow deficit of $5.1 million for the September quarter. Despite those deficits, Harvest has a very healthy cash position, with their filing statement suggesting Harvest has about $232 million in cash after their RTO, subject to $16 million in debt and $34 million in spending to enter Florida.

Harvest’s $850 Million Purchase

Source: Verano Holdings.

On March 11th, Harvest Health announced an all-stock $850 million acquisition of Verano Holdings, owners of Zen Leaf dispensaries:

Harvest Health & Recreation, Inc., a vertically integrated cannabis company with one of the largest footprints in the U.S., is pleased to announce that it has entered into a binding agreement to acquire Verano Holdings, LLC (“Verano”), an arm’s length third party, one of the largest privately held multi-state, vertically integrated licensed operator of cannabis facilities, in an all-stock transaction for an estimated purchase price of approximately USD $850,000,000 based on a share price of CND $8.79. The combined company will be one of the largest multi-state operators (“MSO”) in the U.S., as measured by licenses held and facilities permitted. Upon completion of the transaction and regulatory approval, Harvest will hold licenses that will allow it to operate up to 200 facilities in 16 states and territories across the country, including 123 retail dispensaries.

Harvest Health Press Release, March 11, 2019

 

After the deal, Harvest will have licenses for 123 retail dispensaries across sixteen states.

HRVSF shares at U$7.53NumberValue (U$000s)
Shares, post-RTO, fully diluted287,047,786$ 2,161,470
Shares for San Felasco Nurseries (Florida)8,628,441$ 64,972
Shares for Verano Holdings129,332,480$ 973,874
Fully-diluted market cap425,008,707$ 3,200,316
Net cash, Sep 30, 2018 $ 215,897
Fully-diluted enterprise value $ 2,984,418

Source: Author’s estimates.

Under the teams of the deal, Harvest will also issue shares valued at U$850 million, based on a C$8.79 price for Harvest’s Canadian shares. That implies Harvest Health will issue approximately 129.3 million shares, given current exchange rates. Based on current share prices, Harvest trades at a market cap of approximately $3.2 billion and an enterprise value of $3 billion.

Harvest expects its acquisition of Verano to close in the first half of 2019.

Ties to the Aphria Fiasco?

Last December, Aphria (APHA) was hit with a short seller thesis that involved deals between Aphria and SOL Global Investments (OTCQB:SOLCF), led by Chief Investment Officer Andy DeFrancesco. Aphria has denied all wrongdoing and shareholders have recovered from those losses, but the shockwaves from those allegations have led to sweeping changes at Aphria including the pending departure of CEO Vic Neufeld and Aphria’s continued breakup with Liberty Health (OTCQX:LHSIF).

Because of that, some cannabis investors may be skeptical about deals involving some of those parties. To that end, it may be worth noting that SOL Global Investments owned a significant portion of Verano Holdings and is making a hearty profit on this acquisition:

In October, SOL announced an USD$88 million investment in Class B units of Verano Holdings, LLC, on a brokered private placement basis. Verano is a privately held, licensed operator of cannabis cultivation, manufacturing and retail facilities in four U.S. states (Illinois, Maryland, Nevada, and Florida) with 35+ additional licenses under development in Maryland, Michigan, Ohio, Florida and Puerto Rico. SOL concurrently announced the entering into of a definitive share purchase agreement to acquire all of the issued and outstanding common shares of CannCure Investments Inc.. CannCure indirectly owns 60% of the membership interests of 3 Boys Farms LLC, a Florida-based limited liability company with authorization to cultivate, process and dispense medical cannabis as a licensed medical marijuana treatment center in the State of Florida. Sol is pleased to announce that as of December 11, 2018, Canncure closed on its acquisition of the remaining remaining 40% of the membership interests of 3 Boys. SOL also announced the entering into of an agreement to sell, subject to the completion of the acquisition of CannCure, its entire interest in 3 Boys to Verano in exchange for USD$100 million in additional Class B units. The closing of all transactions related to 3 Boys and CannCure is subject to the receipt of all required governmental approvals including from the Florida Department of Health, Office of Medical Marijuana Use.

Verano is a privately held, vertically integrated cannabis company, aiming to become one of the largest U.S. cannabis businesses in 2019. Along with SOL’s investment, Verano owns and/or manages nine licensed cannabis facilities in the United States, reaching a population of over 42 million. The Company’s strategic investment will give SOL an approximate 28% stake in Verano and expand its investments in key U.S. markets. SOL’s interest in Verano will further strengthen the Company’s position as a leading investor in the U.S. cannabis industry.

SOL Global Press Release, Dec 12, 2018

 

SOL’s 28% stake in Verano Holdings cost $188 million. At a $850 million purchase price for Verano Holdings, SOL stands to receive $238 million in Harvest shares from this deal, for a potential profit of up to $50 million, provided that Verano hasn’t been diluted since SOL’s December press release – great gains for SOL Global and its shareholders.

Comparison to Peers

Harvest Health has more dispensary licenses than any other MSOBy dispensary license count and enterprise value, Harvest Health is a larger and more valuable cannabis company than either MedMen or Green Thumb Holdings.

After purchasing Verano, Harvest holds 123 dispensary licenses, including 30 currently-open dispensaries. Harvest has significantly more dispensary licenses than either MedMen or Green Thumb, with 78 licenses and 83 licenses, respectively.

Harvest is also significantly more costly than MedMen or Green Thumb, with an enterprise value ~50% more than either of its peers including shares added by Harvest’s Verano acquisition and MedMen’s Pharmacann acquisition. Thus, while Harvest has a larger potential footprint than its peers, this potential isn’t free for investors – Harvest also costs more.

Looking Forward

Harvest is expected to surpass MedMen in store count: Today, MedMen has more dispensaries open than Harvest, but company projections expect that to change. MedMen is projecting that they will open 16 new stores in 2019, bringing their total count up to 48 stores by the end of the year, as I discussed in my MedMen coverage. Harvest, however, has much more aggressive targets:

By the end of 2019, Harvest expects to have over 70 dispensaries, 13 cultivation facilities and 13 manufacturing facilities in operation. The company expects continued growth in 2020.

Harvest Health Press Release, March 11, 2019

 

Harvest’s filing statement also projected that Harvest will have over 100 dispensaries open by the end of 2020, which did not include Verano’s dispensaries nor dispensary licenses. Given this purchase, those figures should be even higher.

Harvest Health is projecting enormous growth

Future revenue forecasts: In my full coverage of Harvest last month on The Growth Operation, I spent a lot of time addressing Harvest’s very aggressive revenue forecasts. In its filings, Harvest has projected that they will earn $223 million in revenue in 2019 and $559 million in revenue in 2020. In my coverage, I expressed some doubt that Harvest would be able to accomplish this, given the sequential revenue growth rates required to hit these figures:

To hit its goals, Harvest Health will need to average 53% sequential revenue growth.

Perhaps the Verano Holdings acquisition is part of the reason why Harvest is able to make such bold revenue growth forecasts. To hit $223 million in revenue in 2019, Harvest would need to average 53% sequential revenue growth for the next five quarters. That feat would be staggering, given that Harvest has only hit this figure once over the past six quarters.

However, acquisitions like Verano Holdings could accelerate this process by providing large one-time boosts in revenue capabilities, albeit at the cost of major dilution: After this deal, Verano shareholders will only own ~30% of Harvest Health.

Thoughts

Harvest’s purchase of Verano Holdings is the largest deal in American cannabis history. Through this purchase, Harvest is creating the largest cannabis company in the United States by dispensary license count and by enterprise value. Given their aggressive expansion plans, Harvest is likely to be the largest cannabis company by dispensary count before the end of 2019, a crown currently held by Curaleaf.

 

As the American cannabis industry matures, even before the entry of multi-national cannabis companies like Canopy Growth (CGC), Cronos (CRON), and Tilray (TLRY), I expect to see continued consolidation across the sector as multi-state operators compete for cannabis market share and mind share in this booming segment.

Unlike MedMen, Harvest has very reasonable spending, with an operating cash flow deficit of $2.4 million last quarter, or only about 1% of their total cash on hand. Because of this relatively frugal spending and ample funding, Harvest is more likely to be able to hit their very aggressive expansion targets, like 70+ dispensaries by the end of 2019 and potentially over $550 million in revenue in 2020.

Each of those goals, especially the latter, will require tremendous execution. Purchasing Verano Holdings is a step towards hitting those goals.

Happy investing!