Trulieve Cannabis Corp. (CSE: TRUL) (OTC: TCNNF) is buying Harvest Health & Recreation Inc. (CSE: HARV) (OTCQX: HRVSF) in a US$2.1 billion all-stock deal touted as the biggest American cannabis transaction to date.
On Monday, Florida-based Trulieve said the blockbuster deal will create the largest cannabis company in the United States, based on the two firms’ combined retail and cultivation footprint.
The combined entity will have a retail network of 126 medical and recreational stores across 11 states, as well as 22 growing and processing facilities, according to Trulieve.
The deal comes amid a wave of consolidation in the cannabis sector as the biggest American and Canadian operators prepare for the prospect of U.S. federal legalization.
Companies are looking to cash in on soaring demand for legal pot products since the onset of the Covid-19 pandemic, and as new states including New York, New Jersey, and Virginia legalize, creating new cannabis markets.
Trulieve says once the companies combine they will become the “most profitable” American multi-state operator, with US$461 million in estimated 2021 adjusted earnings before interest, taxes, depreciation, and amortization, and estimated 2021 revenue of US$1.2 billion.
The new firm would rival Massachusetts-based Curaleaf Holdings Inc. (CSE: CURA) as the biggest U.S. cannabis company in terms of revenue. In March, Curaleaf projected US$1.2 billion in revenue for 2021.
Under the deal’s terms, Harvest shareholders will receive 0.1170 of a Trulieve share per Harvest share, a 34 per cent premium over the closing price of Harvest shares on May 7.
Trulieve CEO Kim Rivers says both companies “share similar customer values with a focus on going deep in core markets.”
“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,” Rivers said in a statement.
Arizona launched legal recreational weed sales in January, which are projected to reach US$1 billion annually.
Harvest is the market leader in Arizona, operating 15 stores with licences for four additional locations, as well as 329,000 square feet of cultivation and processing facilities.
The Arizona-based company also has a strong presence in Pennsylvania’s medical market with nine stores.
Trulieve is best known for its dominance in Florida, where it has 82 stores and commands half of the state’s medical market. The company also has dispensaries in California, Connecticut, Massachusetts and Pennsylvania.
The combined company will have three geographical hubs across the U.S., including 20 stores in the Southwest, 16 stores in the Northeast and a major presence in the Southeast with 90 stores in Florida alone.
Deal allows Harvest and Trulieve address their weaknesses
The deal allows Trulieve to shake off its reputation as being primarily a single-state operator. Meanwhile, Harvest will benefit from Trulieve’s strong focus on business fundamentals, as the Arizona firm has accumulated large debts.
On Monday, Harvest reported earnings for the quarter ended March 31, which included total liabilities of US$554 million, with US$240 million in notes payable.
But the company posted US$88.8 million in first-quarter revenue, a sequential increase of 27 per cent.
Adjusted EBITDA came in at US$26.9 million, with a net loss totaling US$23 million, according to a statement.
While Trulieve will continue to operate under CEO River’s leadership moving forward, neither company revealed what role Harvest management and CEO Steve White will take on in the new company.
The deal has been unanimously approved by both boards of directors.
The transaction is subject to approval by two-thirds of Harvest shareholders, U.S. regulators and the Supreme Court of British Columbia, as both firms are listed on the Canadian Securities Exchange and subject to the B.C. Business Corporations Act.
Harvest shareholders will vote to approve the deal in a special meeting to be held in the third quarter, according to the company.
Trulieve also needs to win the approval of each state regulator as well as prove that the deal doesn’t violate U.S. Department of Justice anti-trust conditions before it can close.
In March 2020, Harvest cancelled its US$850 million deal to buy rival multi-state operator Verano Holdings Corp. (CSE: VRNO) (OTCQX: VRNOF), citing that the pandemic created roadblocks in the way of getting the necessary approvals in time.
Shares of Harvest rose 11 per cent to $4.84
Trulieve stock dropped 6 per cent Monday to $46.59.