MJBizDaily Investor Intelligence

1 MJBiz Daily | Investor Intelligence mjbizdaily.com/investing HARVEST HEALTH & RECREATION Headquarters Tempe, Arizona Q3 Revenue $11.2 million Q3 Earnings ($500,000) Ticker CSE: HARV 52-Week High $13.77 CAD 52-Week Low $4.56 CAD • Harvest CEO Steve White shares the motivation for the deal and what else this top multistate operator (MSO) is targeting • Industry analysts and top investors break down the key metrics behind Verano’s $850 million price tag • On the Horizon: A look at the top opportunities and trends as consolidation ramps up across the industry Cannabis Consolidation Behind Harvest Health & Recreation's industry-record $850 million acquisition of Verano Holdings By Lisa Bernard-Kuhn Steve White C annabis MSO Harvest Health & Recreation (CSE: HARV) grabbed national headlines in March when it announced plans to purchase privately held Verano Holdings for $850 million. The all-stock deal is believed to be the largest acquisition in the U.S. cannabis industry to date and is a strong signal that M&A activity will continue to ramp up as major MSOs race to grow their brand and market share. A deeper look at the deal also highlights the premium that U.S. cannabis operators are willing to pay for well-positioned assets—including licenses—in key states. As M&A activity continues to accelerate, here are the top takeaways investors should know about this deal and key metrics to watch for as consolidation ramps up: SIZING UP THE $850 MILLION VERANO PRICE TAG Under the deal, Harvest will acquire Verano’s licenses and operations in 11 states, including seven cultivation licenses and 37 retail licenses. All told, the move will expand Harvest’s reach to 16 states with up to 123 retail dispensaries. Revenues for Verano were not disclosed at the time the deal was announced, making analysis of the valuation tricky. But analysts and industry observers point out that one clear takeaway from the deal is that it was based on the value of assets and licenses rather than revenue multiples. Based in Chicago, Verano is one of the largest privately held cannabis operators in the U.S.—with the majority of its assets positioned in licenses rather than operations that are up and running. Its footprint includes a line of Zen Leaf dispensaries in Illinois, Maryland and Nevada— key states that MSOs are battling for market share. Meanwhile, the company has 45 more licenses under development in other prime states and locations, including Massachusetts, Michigan, New Jersey and Ohio. “Verano doesn’t have a ton of revenue from operations, so this definitely shows a fair amount of confidence in the price of licenses—and that MSOs are starting to develop some muscle memory around what they’re willing to pay for a greenfield development opportunity,” said Mitch Baruchowitz, managing partner at Merida Capital, a New York-based private equity fund focused on the cannabis industry. After factoring in cultivation and existing retail assets, the estimated price paid per dispensary license is likely around $10 million—accounting for roughly 40% of the total purchase price, according to Brett Hundley, an analyst at Seaport Capital. “That seems to be the going rate from what we’ve seen from other transactions that we’ve priced out,” Hundley said. Another clue: In October, Verano closed a $120 million financing that included an $88 million equity investment by Toronto-based Sol Global, giving Sol Global a 15% stake in Verano and valuing the company at around $680 million, noted Andrew Kessner, an analyst with New York- based investment advisory firmWilliams O’Neil. “Harvest paid a bit of a premium compared to the October valuation, but it’s not uncommon right now to see companies raise money in a private round at a certain valuation and then get bought or go public for twice that amount in a matter of months,” Kessner noted. continued on page 2 April 1, 2019 IN THIS ISSUE Metrics That Matter Insider's Guide to Investing Viridian Insights Tilray on Global Expansion