OVERVIEW OF THE DEAL
The largest cannabis operator in Arizona, Harvest Health & Recreation, was acquired on 10th of May 2021 by the largest cannabis cultivator and retailer in Florida, Trulieve Cannabis. The $2.1Bn deal will create one of the largest cannabis companies in the U.S.
The potential geographic expansion synergies are obvious since Trulieve will have control over 126 new dispensaries and 22 cultivation facilities across 11 states. Moreover, the financial synergies are expected to have a huge impact on the U.S marijuana market due to the fact that revenues of the conglomerate might surpass $1.2Bn and that would make Trulieve one of the largest companies in this market.
In a note published after the deal’s announcement, Cowen Research said that the deal will give Trulieve industry-leading margins at 37%. “The transaction will create the largest U.S. cannabis operator on a combined retail and cultivation basis and the most profitable U.S. [cannabis company] on an adjusted EBITDA basis,” Cowen’s Viven Azer wrote.
Company Details: Acquirer – Trulieve Cannabis Corp
Founded: 1940
Headquarters: Florida, US
CEO: Kim Rivers
Status: Public
Number of Employees: 4,445
Market Cap: CAD 8,584 bn
Revenue: CAD 699.3 mio
EBITDA: CAD 322.4 mio
Trulieve Cannabis Corp is a medical cannabis company that aims at growing and manufacturing a range of products, such as concentrates, flowers, oils, capsules and tinctures. It runs more than fifty medical marijuana dispensaries in Florida and in California. In November 2020, it acquired PurePenn LLC in order to acquire a growing and processing facility in McKeesport, Pennsylvania. It also runs three dispensaries in the Pittsburgh area that provide medical marijuana relief to Pennsylvanians who have been diagnosed with severe medical conditions. The firm’s main subsidiaries are PurePenn LLC, Pioneer Leasing & Consulting LLC and Keystone Relief Centers LLC. The company is fastly growing and it achieved record quarterly revenues of $193.8 million in Q1 2021, which represents a 102% growth compared to last year. The public share of Trulieve represents 50% of the shareholding structure and the two main individual investors are CEO Kimberly Rivers (13%) and Thad Beshears (12%).
Company Details: Target – Harvest Health & Recreation Inc
Founded: 2007
Headquarters: Arizona, US
CEO: Steve White
Status: Public
Number of Employees:
Market Cap: CAD 2,004bn
Revenue: CAD 310.4mio
EBITDA: CAD -29.6 mio
Headquartered in Tempe, Arizona, Harvest Health & Recreation Inc. is a vertically integrated cannabis company and multi-state operator. Since 2011, Harvest has been committed to expanding its retail and wholesale presence throughout the U.S., acquiring, manufacturing, and selling cannabis products for patients and consumers in addition to providing services to retail dispensaries. Through organic license wins, service agreements, and targeted acquisitions, Harvest has assembled an operational footprint spanning multiple states in the U.S. Harvest’s mission is to improve lives through the goodness of cannabis.
SYNERGIES
1. Targeted synergies
The biggest benefit concerning such acquisition consists in Trulieve's upgrade to the most profitable US multi-state operators with coast-to-coast extension. Additionally, considering that the companies share similar customer values and focus in deepening their presence in the core markets, the acquisition will offer them the opportunity to leverage their operations and develop a strategy for future growth, with market expansion throughout new US states. The transaction will lead to an increase in sales across their hub markets, deliver a superior existing retail and distribution model, optimize a nationwide presence, leverage expert operational teams, and increase the brand's name.
2. Synergies analysis
We believe that the synergies realized through the deal are positive. Since both companies operate in the same industry, cost synergies could be realized due to economies of scale and the elimination of duplicated equipment, layoff of employees, among other cost cutting strategies.
However, the main source of synergies derives from revenue synergies, due to market expansion, especially because Harvest's footprint complements Trulieve's current asset base. There is a belief in grasping customers from Arizona, due to its high growth market given the cannabis legalization in January 2021, and Pennsylvania, due to its high-growth medical market and potential for adult legalization.
While the elimination of costs through employee lay-offs and equipment sale can provide short-term profit increase to the new company, the acquisition and mostly retention of a larger customer base are mostly long-term consequences of such acquisition, especially because legalization in these states have just occurred or are yet to occur, therefore it can still take a few years for the population to adapt to these new habits. Additionally, in case other states also legalize cannabis (either as a domino effect or not), such benefits could also be reaped later on, also being important to increase the firm's brand awareness.
RISKS AND UNCERTAINTIES
Even though this deal would allow Trulieve to expand its overall presence on the American cannabis market, important gaps remain as the New York, New Jersey and Illinois markets would not be covered by the new combined company. Thus, Trulieve would not be able to challenge its biggest U.S. competitor everywhere, namely the Chicago-based company Cresco Labs, which already operates in 10 different states including Illinois and New York. This has led some commentators to highlight that Trulieve could have developed its activities in new markets in other ways and at a lower cost than with its deal with Harvest Health & Recreation.
Another risk lies in the required review process by American antitrust regulators, who were until recently rather reluctant to merger deals in the cannabis industry out of essentially moral considerations. Indeed, previous deals in this industry have failed in part because of the lengthy delays imposed by the U.S. Justice Department. However, the change of administration in the United States and the arrival of Democrat Merrick Garland at the head of the Department of Justice could mean a more favorable outlook for the cannabis sector, as the new Attorney general has already said that he intends to take a friendlier stance on cannabis.
FINANCIAL CONSEQUENCES
The deal is financed 100% in shares, and it means that Trulieve gives to the Harvest’s investors about 0.117 Trulieve stocks for every Harvest stock (i.e. exchange ratio =0,117). Therefore, Harvest’s shareholders effectively hold around 26.7% of the issued and outstanding equity of the combined company, whereas Trulieve’s investors own the remaining 73% of the shares issued.
We assume that the combined entity will have revenues of about $1.24 billion and an adjusted EBITDA of about $461.0 million, in accordance with the related consensus. As to the financial leverage, the new combined entity will have a net financial debt of $303.0 million and this depends on the sum of the Harvest’s net financial debt before the deal, that was $254.2 million, and the Trulieve’s ex-ante financial position which was $48.9 million. Then, the ratio Net-Financial-Debt-to-EBITDA (i.e. NFD/EBITDA) of the new combined entity is expected to be about 0.66. Based on these relevant financial figures, we can easily think that the deal is very profitable, especially for the buyer Trulieve, since it improves the value of its NFD/EBITDA ratio and it increases the EPS, while containing dilution.
IS THIS DEAL FAIRLY PRICED?
Trulieve’s share price dipped after the announcement of the merger over the market. Specifically, it falls about 6% compared to its share price before the announcement which was $40.89 per share. Harvest instead sees an 11% increase after the announcement of the deal, from its initial value of $3.58 per share. The overall deal is based on the agreement that the buyer Trulieve pays about $2.1 billion to acquire Harvest company, with a premium of about 34%. Thus, the implied Harvest share price is $4.79.
We believe the price target is well-supported, considering Trulieve’s strong dominance of Florida’s rapidly evolving medical cannabis market and its increasing presence in Pennsylvania, California, Connecticut and Massachusetts. We also think that the deal is fairly priced, especially because this transaction has been considered as one of the largest and most exciting acquisitions so far in the US cannabis space. Indeed, Trulieve and Harvest are regarded as the leaders in the cannabis markets, recognized for their innovation, branding, and operational expertise with true depth and scale of businesses. They also share similar customer values with a focus on the local markets: for instance, they provide best-in-class services to patients and other typologies of customers on a broader national scale. Therefore, there are many operational and financial synergies to be considered in the analysis of the deals.
Authors: Aisha Jinsi, Anubhav Narwal, Mathieu Gentaz, Titouan Guillon, Youssef Nammour, Alexis Bernet, Cesare Campisi
Contact: alexis.bernet@hec.edu
Date: 26-May-2021