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May 11, 2021, 7:09 a.m. EDT

Trulieve buys Harvest Health in $2.1 billion cannabis deal that gives it access to Arizona adult-use market

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Ciara Linnane

Trulieve Cannabis Corp. said Monday it has agreed to acquire Harvest Health & Recreation Inc. in an all-stock deal valued at about $2.1 billion, the latest tie-up in a sector hoping for reforms of strict U.S. cannabis laws that would crack open capital markets.

The deal combines two U.S. multi-state operators, with Trulieve /zigman2/quotes/207658767/composite TCNNF +2.99% /zigman2/quotes/210560499/delayed CA:TRUL +3.30% , which is based in Quincy, Florida, focused on the northeast and southeast regions of the U.S., while Harvest Health /zigman2/quotes/207218380/composite HRVSF +3.09% /zigman2/quotes/201825604/delayed CA:HARV +2.50% , based at Tempe, Arizona, is focused on the west coast and northeast regions.

Harvest shares soared 15% on the news, while Trulieve was down about 3%.

The new entity will have operations in 11 states with 22 cultivation and processing facilities with a total capacity of 3.1 million square feet and 126 dispensaries serving the medical and adult-use recreational cannabis 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,” said Trulieve CEO Kim Rivers in a statement.

Under the terms of the deal, Harvest shareholders will receive 0.1170 of a subordinate voting share of Trulieve for each Harvest subordinate voting share owned. The exchange rate implies a price per Harvest share of $4.79, equal to a 34% premium over its closing price Friday.

Cantor Fitzgerald analyst Pablo Zuanic said the deal will elevate Trulieve to the leading position in the cannabis market in Arizona and bring it close to that position in Pennsylvania, while adding to its dominant share in Florida, where it has a 50% market share. Zuanic has been concerned that Trulieve looked more like a single-state operator than a multi-state one in the past.

“That said, we could argue a more piecemeal approach (asset collection) could have been less costly (the all-stock deal values Harvest at $2.1 billion, or 20 times calendar year 2022 EBITDA vs. 9 times for Trulieve), and entry to other strategic states (NJ, NY) more beneficial to the stock long term,” Zuanic wrote in a note to clients. ” But we realize Harvest is a fully-fledged operation with intrinsic value beyond just assets (it certainly navigated the early start of rec in AZ rather well).”

Cantor is sticking with its outperform rating on Trulieve stock, but lowered its stock price target to $76 from $89 to reflect the expanded share count to 181 million.

Don’t miss: U.S. cannabis producers are now favored by Wall Street analysts, who’ve soured on Canadian companies

Morgan Paxhia, co-founder and managing partner of cannabis investment fund  Poseidon , said the deal is further evidence that the U.S. is the key cannabis market and called on policymakers to move fast on reforms.

Cannabis is still classified as a Schedule I drug at the federal level, hampering the development of the legal sector and keeping companies mostly out of the federally insured banking sytem.

  “US cannabis generated $18 billion in legal sales in 2020 without federal banking,” Paxhia said in emailed comments. “According to Headset, we are on pace to hit $22.7 billion in 2021 in the US alone and still without federal banking.

Cannabis also generated 321,000 jobs last year in the U.S., as noted by Leafly, he added. “We are building the next great American industry and look to the Senate to pass the SAFE Banking Act as a necessary step forward for the US cannabis industry,” said the investor.

Dan Ahrens, portfolio manager of the AdvisorShares Pure US Cannabis ETF and the AdvisorShares Pure Cannabis ETF /zigman2/quotes/211349815/composite YOLO +5.32% , said the U.S. market is at least 10 times the size of the Canadian market and agreed there is a pressing need for reform. Canada fully legalized cannabis in October of 2018, although Canadian companies have struggled to make profits since then thanks to a slow rollout of stores and continued competition from the black market.

“U.S. companies like Trulieve have already been operating with strong profitability and remarkable year-over-year growth, while virtually all Canadian cannabis companies continue to lose money quarter after quarter,” he said.

Once reforms happen, “it should serve as a huge catalyst to U.S. cannabis companies. Many people think US cannabis companies are operating ‘with one hand tied behind their back’, as they cannot list of major exchanges, do federal banking, or deduct business expenses (280e). All of those things make institutional investments very (hard) to get,” said Ahrens.

The deal comes a week after Canadian licensed producers Tilray Inc. /zigman2/quotes/209129655/composite TLRY +25.77% /zigman2/quotes/226578748/delayed CA:TLRY +25.08% and Aphria Inc. announced the closing of their merger, creating the world’s biggest cannabis company measured by revenue.

See now:  Cannabis stocks rally after Chuck Schumer leads drive for reforms that may end federal prohibition

In April, Canopy Growth Corp. /zigman2/quotes/200603886/composite CGC +6.70% /zigman2/quotes/202205609/delayed CA:WEED +6.71% , an early leader in the Canadian sector thanks to a $4 billion investment from beverages giant Constellation Brands Inc. /zigman2/quotes/207737284/composite STZ +0.03% , s aid it was acquiring Toronto-based Supreme Cannabis Co. Inc. , in a stock-and-cash deal valued at about C$435 million ($346 million).

Also in April, Organigram Inc. /zigman2/quotes/209289540/composite OGI +10.98% , another Canadian player, acquired The Edibles & Infusions Corp. for C$22 million in stock, plus up to an additional C$13 million in shares, in its first deal since  receiving a C$221 million ($176 million) investment from British American Tobacco PLC.

In February, Hexo Corp. /zigman2/quotes/206508254/composite HEXO +7.00% /zigman2/quotes/200008967/delayed CA:HEXO +6.53% acquired Zenabis Global Inc. in an all-stock deal valued at about C$235 million.

The Cannabis ETF /zigman2/quotes/213173823/composite THCX +6.22% has gained 36% in the year to date. The AdvisorShares Pure US Cannabis ETF /zigman2/quotes/220307682/composite MSOS +2.20% has gained 15% and the S&P 500 /zigman2/quotes/210599714/realtime SPX -0.02% has gained 12.6%.

See now: New York’s 13% cannabis tax may be too high, since state has ‘one of the most sophisticated’ black markets in U.S., expert says

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