Harvest Buys Verano to Solidify Market Position Post-Prohibition (Whenever That Happens)
The biggest cannabis companies aren't big compared to the companies poised to enter the market if and when federal prohibition ends.
Harvest Health & Recreation is set to acquire Verano Holdings for the jaw-dropping price tag of $850 million, the largest single acquisition in cannabis history and the next step in Harvest's vision of becoming the most valuable cannabis company in the world.
In March, the two companies entered into a binding agreement that, once finalized, will make Harvest a dominant force in the industry, with licenses to operate 200 cannabis cultivation, manufacturing and retail facilities in 16 states and territories across North America.
Harvest CEO Steve White calmly described the Verano acquisition as "just part of the evolution of the industry," but experts and analysts said the blockbuster, all-stock deal is emblematic of the increasing competition to acquire licenses and expand retail footprints before federal policy changes open the floodgates for institutional investors.
"There is absolutely a race to beat the end of prohibition," said Tom Zuber, managing partner of the law firm Zuber Lawler, which serves the global cannabis community.
Zuber said Harvest is taking advantage of the federal prohibition of marijuana, which has prevented major corporations from entering the U.S. cannabis industry.
"When prohibition ends, a lot of deep pockets are going to enter the market -- pharmaceutical companies, alcohol companies and so forth," he added. "In that context, it will be much harder for smaller companies, and cannabis companies today are smaller companies. It's going to be harder for them to compete."
White said that scenario is exactly what Harvest is ready for.
"When large financial partners are prepared to come into the U.S. cannabis arena, we want to be their first choice," White told Marijuana Venture.
Dena Jalbert, the founder and CEO of Align Business Advisory Services, said mergers and acquisitions are the fastest vehicle for multi-state operators to expand. Most cannabis companies require a huge up-front investment to get licenses and build out facilities before an operation can generate revenue — a process that can take a significant amount of time and burn through a substantial amount of capital.
"An acquisition like this allows an organization to bypass all of that and immediately get access to all of the market," Jalbert said of the Harvest-Verano deal.
Harvest and Verano set a deadline of April 9, 2019 to sign a definitive agreement and finalize the acquisition.
Harvest is "looking forward to integrating Verano's people and assets as quickly as we can," White said.
The companies agreed to a mutual termination fee of $20 million should either entity fail to enter the agreement.
"This (termination fee) is probably just doing due diligence on each other seeing if there are any undisclosed liabilities," said attorney William Gay, a partner at Wilson Elser who has extensive experience in mergers and acquisitions. "In this case, Harvest is the publicly traded company and Verano is private, so Harvest would be looking very closely at Verano because they haven't been a recording company."
Gay said the "stock-for-stock deal" is typical for publicly traded cannabis companies since federal laws in the U.S. prohibit both businesses from domestic banking transactions.
The $850 million price tag was based on Harvest's share price of CAN $8.79. The acquisition is believed to be the largest to date in the U.S. cannabis industry, surpassing MedMen Enterprises' acquisition of PharmaCann in an all-stock deal valued at $682 million.
Since going public in November 2018, Harvest (CSE: HARV; OTCQX: HRVSF) has made several high-profile acquisitions and expanded rapidly.
"Our pace is unlike any you've seen in this industry," White said.
Within the past five months, Harvest acquired San Felasco Nurseries, a vertically integrated company in Florida, CBx Enterprises, a Colorado-based extraction and manufacturing company, and Falcon International, a California cannabis producer, processor and distributor.
The Verano acquisition will make Harvest the largest multi-state operator in the industry, based on the number of licenses held, according to the company. Harvest was already one of the biggest cannabis companies in the U.S., with more than 600 employees and licenses for 140 cannabis facilities. The company has grown steadily since opening its first dispensary in Arizona in 2011.
"This is a natural match between like-minded entrepreneurs who have built our companies from the initial facilities into two of the largest MSOs (multi-state operators) in the U.S., with an unwavering focus on operational excellence, superior quality products and service and delivering value to customers and shareholders," Verano co-founder and CEO George Archos said in a press release announcing the deal. "Our growth and unique positioning in key markets allowed us to evaluate some of the largest players in the space, but we only had one unanimous choice for a major transaction and that was Harvest."
Post-acquisition, Harvest plans to hire an additional 300 employees, which would bring the combined companies up to about 1,200. Harvest expects to have a total of 13 cultivation facilities, 13 manufacturing facilities and 70 dispensaries operational by the end of 2019. White said the company will continue acquiring other businesses as it moves forward with construction. Harvest has accrued enough capital to fund current and further expansions through 2020.
Since Harvest and Verano both have branded cannabis products in similar categories, it's unclear what will happen to Verano's brand identities, but White said he's found the two companies' assets to be complementary. For example, Verano has had more success with edibles and branding its flower, while Harvest has a wider range of vape pen lines.
"We anticipate being overly inclusive and really utilizing the distribution channels to push more brands in more places. … We think there is a place for almost everything under the umbrella," White said.
Changes in Harvest's executive leadership have not been announced, but White said the company plans to utilize acquired infrastructure as an East Coast hub for Harvest and continue operation of Verano's nine Zen Leaf locations.
"Harvest is very smart in how it's going about acquiring licenses," Zuber said, pointing out that both Harvest and Verano appear to be very profitable. "That's a sign of discipline."
"I think one of the big opportunities here is that (Harvest is) picking up a proven team that has operational experience, grow experience and, on top of that, retail experience," Jalbert said. "The thought leadership that you are acquiring — you can't find people with this kind of institutional knowledge."
Jalbert also said she believes a driving factor of the acquisition for Harvest was gaining access to Verano's research and development and retail analytics, which could prove to be an invaluable resource in forecasting product trends and desired deliverables to consumers.
Gay said the organic R&D assets, such as genetics or any cannabis material, is much more limited in potential, because federally illegality forbids cannabis from being transferred across state lines.
"If Verano has technology in breeding or whatever it is that is of interest to Harvest, they are going to have to figure out how to do that without transferring any clones or seeds," he said.
Although the cannabis industry remains a mine field of risks and uncertainty, experts agree the pace of consolidation is likely to accelerate.
"The mergers and the acquisitions that are happening right now are a sign that the cannabis industry is growing up," Zuber said. "In some sense that will be good for consumers because there will be a sophistication of corporate leadership entering the market. It may ultimately reduce options for consumers, but overall I think that it's a sign of good health in the sense that the cannabis industry is moving in the right direction. It's maturing toward legalization and I find that to be a very good thing."