đź’”Harvest and Verano - Mutual Termination of Business Combination Agreement

Harvest Health & Recreation Inc. (CSE: HARV,OTCQX:HRVSF) and Verano Holdings, LLC announced the mutual termination of the Business Combination Agreement dated April 22, 2019.

From the press release -

Prolonged obstacles in meeting requirements for state and local regulatory authorities needed to transfer ownership and operational licenses, adverse capital market conditions, a challenging environment for asset sales, all contributed significantly to the decision not to move forward with the pending acquisition. No breakup fees or other considerations are owed by either party as a result of the termination of the BCA.

"Given the persistent challenges in consummating this deal and current market conditions both companies felt it was prudent to move forward separately at this time," said Steve White, Harvest CEO. "We have tremendous respect for the entire team and operations at Verano Holdings. We wish them well and look forward to possibly working together in the future." 

Mr. White continued, "We remain focused on continued development of assets in our core markets including Arizona, Florida, Maryland, and Pennsylvania. Recent capital raising efforts have afforded the company sufficient resources to continue to invest in strategic projects while moving toward profitability." 

"This decision was not taken lightly," said George Archos, Verano Holdings CEO. "While both organizations worked very hard to consummate this transaction, significant delays in closing started with the Hart-Scott-Rodino antitrust review process. Those were followed by state and local regulatory complexities in multiple states. Now with the COVID-19 pandemic often being dealt with in the very agencies that must approve the transaction, it has become clear that this combination would not be completed within the established timeframe. We look forward to continuing to grow our operations as one of the largest privately held multi-state operators in the U.S."

Original Deal Terms

Harvest Health had agreed to buy Verano in an all-stock deal valued at ~$850M based on a share price of C$8.79. The stock was lately trading at C0.86 - C$1.75 over the past week (down 18.5% today while markets were up). Similar to the MedMen/PharmaCann deal termination, the valuation from announcement to close was a substantial drop, one that Verano likely thinks it could improve upon by going at it alone (raising capital, building out raw licenses, waiting for capital markets to improve) or looking for another MSO with a more stable stock.

Verano Business / Footprint

  • Licenses and operations in 11 states and territories, including 7 cultivation licenses

  • 40 retail licenses, with 14 stores opened (Illinois, Maryland, Nevada and Oklahoma, Massachusetts, Ohio, New Jersey)

  • Portfolios of proprietary brands with more than 150 product SKUs sold in 150 retail location

  • Cultivation operations in Illinois, Maryland and Nevada with expansion capacity of 900,000 square feet (attractive exposure in Illinois as #1 wholesaler)

  • ~$80M estimated sales in 2019, ~$200M estimated revenue for 2020

Where Harvest goes from here

Looking at the deal that did get done (Have a Heart) vs. the two that didn’t (Falcon International and Verano), it seems like the Company is choosing to focus on going deeper with current dispensaries (operational) to drive value. Verano was profitable so Harvest wasn’t going to need cash to fund current operations but would have had to fund future build-out requirements. The deal termination should help alleviate cash concerns as the company focuses its efforts on existing core markets (AZ, PA, FL and MD) and positions itself as more of a medical cannabis Company.

Management has terminated two out of three deals in a quarter while the stock is at 9% of its 52-week high. Management will need to execute (meet or beat estimates) over the remainder of the year to drive value while preserving cash for optionality.