🍊Trulieve acquires 🌵Harvest in $2.1B stock deal

2021E Revenue of $1.2B / EBITDA of $461M (37% margin)

Press Release
Investor Presentation

The industry consolidation continues, and in a big way ($2.1B), with a top MSO acquiring a second-tier MSO. Harvest (HRVSF) ended the day +12.0% while Trulieve (TCNNF) ended the day -5.7%.

Thoughts:

CPG-like Valuation. 5.3x 2021E Revenue of $400M (with GM of 50%+). Trulieve paid a premium for Harvest but it seems the Company prioritized going deeper in key markets/scale over valuation. Harvest most recent quarter was impressive, with $88.8M in Q1 2021 Revenue (up 101% YoY), 54% GM, and $26.9M in Adjusted EBITDA (30.3% margin).

Lower Cost of Capital for Cannabis Helping Drive M&A. As of March 31, 2021, Harvest has $29.7M in short-term notes payable and $240M in long-term notes payable. Given GTI’s recent debt financing at 7%, this seems like a move Trulieve is likely to follow as they look to service the $270M in debt from Harvest. The potential to raise debt at a relatively lower interest rate likely made the deal more feasible.

Trulieve Gets More Acquisitive in CA. The main reason Trulieve acquired Harvest was to immediately put itself into the #1 position (ahead of Curaleaf) in Arizona (15 operational stores and licensed for 4 more), which has quickly become a top 5 adult-use market (moving ahead of more mature markets in Colorado and Oregon) since recreational Cannabis sales started at the end of January. This gives Trulieve the #1 market share in Florida and Arizona. Outside of one dispensary in Palm Springs, Trulieve hasn’t shown California much love. The Company picks up an additional 4 location from Harvest (Venice, Palm Springs, Grover Beach, Napa) and will likely want to further increase its footprint in their new Southwest hub.

Major Brand Acquisition Next? The Pro Forma Trulieve + Harvest combination is projected to be just $27M short of Curaleaf for the title of biggest MSO by revenue, and given the Company’s history of execution, they could finish the year in the #1 spot. Curaleaf has a top brand (Select) in its portfolio and given the press release language that it added “successful line of products” (read: adequate but nothing exciting), the Company might be wise to make another splash by acquiring one of the larger West Coast brands.

Ability to Keep PA Licenses. PA caps the number of licenses one Company can hold at five, with three dispensaries per licenses for a total of 15. Harvest has already reached the limit (currently operates 9 dispensaries with a 10th opening soon). Trulieve acquired three dispensaries from Solevo (November 2020) in the Pittsburgh-area and three dispensaries from Keystone Shops in the Greater Philadelphia area (pending). Unless Trulieve is able to convince regulators to let it keep the seven licenses it has between the combined companies, they’ll have to divest two licenses/six locations (Trulieve successfully argued to increase the cap in FL beyond 35 back in 2019).

Next up: Vireo Health or Etain? To really beef up the Northeast hub, Trulieve will have to make a NY play, and there’s one second-tier MSO (Vireo) and private option (Etain) that might be a fit based on limited overlap in footprint. New York is a limited license state with just 10 licenses awarded to medical marijuana operators — Acreage Holdings (Canopy), Columbia Care, Cresco Labs, Curaleaf, iAnthus (has not sold licenses piecemeal), Etain Health (private), GTI, Ascend Wellness (acquired from MedMen), PharmaCann (private, overlapping footprint in 3/6 states — MA, MD, PA) and Vireo Health (limited dispensary overlap: AZ—1, MD—1, MN—8, NM—2, and NY—4).


Press Release

Trulieve (CSE: TRUL) (OTC: TCNNF) and Harvest have entered into a definitive arrangement agreement pursuant to which Trulieve will acquire all of the issued and outstanding subordinate voting shares, multiple voting shares and super voting shares of Harvest. Under the terms of the Arrangement Agreement, shareholders of Harvest will receive 0.1170 of a subordinate voting share of Trulieve for each Harvest subordinate voting share (or equivalent) held, representing total consideration of ~$2.1 billion based on the closing price of the Trulieve Shares on May 7, 2021.

Trulieve, a leading multi-state operator with a focus on the northeast and southeast regions of the United States, and Harvest, a leading multi-state operator with a focus on the west coast and northeast regions of the United States, have built deep, vertically integrated operations in their key markets, becoming leading operators in the United States, the world's largest regulated cannabis market.

Upon completion of the Transaction, as well as the closing of other previously announced acquisitions by Harvest and Trulieve, the combined business will have operations in 11 states, comprised of 22 cultivation and processing facilities with a total capacity of 3.1 million square feet, and 126 dispensaries serving both the medical and adult-use recreational cannabis markets.

Key Transaction Highlights and Benefits

Increases Scale Across Hub Markets. Creates the largest U.S. cannabis operator on a combined retail and cultivation footprint basis

Creates the Most Profitable US MSO. Combined 2020 Adjusted EBITDA of $266M and combined 2021E consensus Adjusted EBITDA of $461M

Delivers a Superior Existing Retail and Distribution Model. 126 dispensaries across 11 states, the combined company will have leading market shares in Arizona and Florida

Strong and Expanding Multi-State Presence. Bolsters Trulieve's expansion in US northeast and southeast hubs in FloridaPennsylvania and Maryland, and establishes a southwest hub in core markets including Arizona

Optimizes Nationwide Presence. Well-established retail and wholesale channels across markets, as well as the ability to reach an estimated total addressable market of $19.3B in 2025E (Arcview market estimate)

Adds Premium Brands. Successful line of products across multiple form factors

Leverages Expert Operating Teams and Best Practices. Operational excellence by combining unparalleled knowledge of, and success in winning, state license application processes and the ability to rapidly bring operations to market

Accretive Transaction Reinforces Trulieve's Leading Financial Metrics. Reinforces superior financial performance relative to peers through industry-leading margins and strong projected profitable growth

Terms of the Transaction

The Transaction will be effected by way of a plan of arrangement pursuant to the Business Corporations Act (British Columbia). Under the terms of the Arrangement Agreement, Trulieve will acquire all of the issued and outstanding Harvest Shares, with each Harvest Shareholder receiving 0.1170 of a Trulieve Share for each Harvest Share, implying a price per Harvest Share of $4.79, which represents a 34% premium to the May 7, 2021 closing price of the Harvest Shares. After giving effect to the Transaction, Harvest Shareholders will hold ~26.7% of the issued and outstanding pro forma Trulieve Shares (on a fully-diluted basis). The Exchange Ratio is subject to adjustment in the event that Harvest completes certain interim period refinancing measures, with the potential adjustment in proportion to the incremental costs from such financing relative to the Transaction value.

The Transaction has been unanimously approved by the Boards of Directors of each of Trulieve and Harvest. Harvest Shareholders holding more than 50% of the voting power of the issued and outstanding Harvest Shares have entered into voting support agreements with Trulieve to vote in favor of the Transaction.

The Arrangement Agreement provides for certain customary provisions, including covenants in respect of non-solicitation of alternative transactions, a right to match superior proposals, $100 million reciprocal termination fees under certain circumstances and reciprocal expense reimbursement provisions in certain circumstances.

The Transaction is subject to, among other things, the approval of the necessary approvals of the Supreme Court of British Columbia, the approval of two-thirds of the votes cast by Harvest Shareholders at the Special Meeting, receipt of the required regulatory approvals, including, but not limited, approval pursuant to the Hart–Scott–Rodino Antitrust Improvements Act, and other customary conditions of closing. Approval of Trulieve Shareholders is not required. Additional details of the Transaction will be provided in the Circular.

The Harvest Board has unanimously determined, after receiving financial and legal advice and following the receipt and review of a unanimous recommendation of a special committee of independent directors, that the Transaction is in the best interests of Harvest, and that, on the basis of the Fairness Opinion (as defined herein), that the consideration to be received by the Harvest Shareholders is fair, from a financial point of view, to the Harvest Shareholders.

Management Commentary

"Today's announcement is the largest and most exciting acquisition so far in our industry, creating the most profitable public multi-state operator.  Importantly, our companies share similar customer values with a focus on going deep in core markets. This combination offers us the opportunity to leverage our respective strong foundations and propel us forward with an unparalleled platform for future growth. Harvest provides us with an immediate and significant presence in new and established markets and accelerates our entry into the adult use space in Arizona. Trulieve and Harvest are leaders in our markets, recognized for our innovation, brands, and operational expertise with true depth and scale in our businesses. We look forward to providing best-in-class service to patients and customers on a broader national scale as we create an iconic US cannabis brand."

— Kim Rivers, CEO, of Trulieve