By Steve Gelsi
Harborside Inc. chairman Matthew Hawkins said the company plans to continue making acquisitions in California to build up its presence in the largest legal cannabis market in the U.S.
The Oakland, Calif., company /zigman2/quotes/212754168/delayed HBORF 0.00% /zigman2/quotes/201159460/delayed CA:HBOR 0.00% is merging with two companies in Southern California: dispensary operator Urbn Leaf and cultivation specialist Loudpack, as announced on Monday.
“In this situation, the whole is a lot better than the sum of the parts because scale is going to win in California,” Hawkins told MarketWatch.
Harborside closed its $44 million acquisition of Sublime LLC, a cannabis manufacturer based in Oakland, in July.
Harborside plans to combine Urbn Leaf, Loudpack and Sublime and then change its name to StateHouse for trading on the Canadian Securities Exchange under the ticker “STHZ,” with shares also available on the U.S. over-the-counter market. The deals are expected to close in the first quarter of 2022.
“We’ve got a task of integrating four companies and that’ll be our primary focus,” Hawkins said. “And then after the first quarter, we’ll start looking. Our deal pipeline is full of opportunities, but we have to be smart when we pounce.”
As part of the latest deal, Urbn Leaf CEO Ed Schmults will become CEO of StateHouse. However, Harborside will continue to control the company with three seats on its board of directors, with Hawkins remaining as chairman. Hawkins is also founder and managing principal of Cresco Capital Management LLC, which initially invested in Harborside in 2016. Hawkins joined the board of Harborside in 2018.
Urbn Leaf will combine its cannabis dispensaries in Southern California with Harborside’s retail presence in Northern California, while Loudpack and Sublime will add to the company’s brand portfolio and cannabis cultivation holdings.
With combined revenue of $215 million to $220 million, StateHouse plans to continue to bulk up to compete in the fragmented California cannabis market, which has been facing oversupply and competition from lower-priced product from the illicit, or legacy market.
Despite these obstacles, the California market offers rich rewards in some respects because of its size and fragmentation. The state’s legal cannabis business now counts 7,800 cultivators, 1,000 distributors and 1,300 brands, with projected sales of $7.4 billion by 2025, according to figures in a presentation by Harborside.
Harborside is positioning itself as the largest cannabis platform in the state with retail stores, brands, processing, manufacturing, distribution and cultivation.
Other larger players in California include Glass House Brands Inc. /zigman2/quotes/213284731/delayed GLASF +5.83% and Lowell Farms Inc. /zigman2/quotes/212177220/delayed LOWLF -6.74% /zigman2/quotes/212120198/delayed CA:LOWL -2.86% .
As part of its acquisitions of Urbn Leaf and Loudpack, Harborside inked a letter of intent with Pelorus Equity Group to complete $77.3 million of non-dilutive real estate debt financing.
Travis Goad, managing partner of Pelorus Equity Group, said the financing deal with Harborside marks its largest individual debt deal since the firm launched in 2010. The Laguna Hills, Calif.-based specialty finance company expects to have about $250 million in assets under management by the end of 2021.
Despite weak stock prices in the sector, the businesses remain viable, he said,
“We’re seeing the revenue on these assets are still growing and the markets are growing,” Goad said. “Even though equities are underperforming, the underlying U.S cannabis businesses are growing. That’s what we care about. These assets really have value. Even in a more mature market like Colorado, it’s still growing at about 20%. The price action in the public equities market doesn’t really reflect what you’re seeing on the ground in these businesses.”
Shares of Harborside fell 3.7% to 52 cents a share on Friday. The stock is down 67% so far in 2021, compared to a 24.9% YTD loss by the Cannabis ETF /zigman2/quotes/213173823/composite THCX +1.56% .