The once-booming market for cannabis mergers and acquisitions is now feeling fallout from the COVID-19 pandemic, on top of all the other problems that have brought M&A activity to a virtual halt in the industry.
Harvest Health & Recreation’s planned acquisition of privately held Verano Holdings was called off Thursday, with the companies citing “prolonged obstacles” that include the coronavirus crisis.
While COVID-19 was only a contributing factor, it was specifically blamed for the decision to terminate the deal, on top of several other factors such as regulatory delays and difficult capital market conditions.
When the all-stock deal was first announced in March 2019, it was greeted with great fanfare and seen as the biggest planned transaction in the industry based on its $850 million valuation.
“The acquisition is the next step in Harvest becoming the largest cannabis company in the world,” Steve White, CEO of Arizona-based multistate operator Harvest, said during an investor conference call celebrating the deal.
Now, just over a year later, the deal has fallen apart, mirroring other failed transactions in the industry, including MedMen’s cancellation of its purchase of PharmaCann and Cresco Labs ending its VidaCann acquisition.
The environment for such blockbuster deals is very different now than it was this time a year ago.
“This deal was struck in a much different time, when the market rewarded empire building over positive cash flow,” said Mike Regan, equity analyst at Marijuana Business Daily’s Investor Intelligence.
“Today, companies need to focus on generating positive cash flow to survive and prove out a viable business model to investors.”
All that said, the Harvest-Verano deal seemed very much on track as recently as early November when Harvest said both companies had complied with antitrust scrutiny from the U.S. Department of Justice, paving the way for closure of the transaction.
“Our commitment to bringing these two great companies together has never been in doubt despite any delays,” White said at the time.
Since then, Harvest has also dropped a planned acquisition of California-based Falcon International – though the two companies remain in litigation – restructured a planned deal with vertically integrated CannaPharmacy and closed an $85 million deal to buy Interurban, owner of the Seattle-based Have a Heart marijuana group.
The ending of the Verano deal was the right move for Harvest given current market conditions, said Matt Karnes, founder and managing partner of New York-based cannabis consultants GreenWave Advisors.
“It’s clearly a better outcome for Harvest at this time given the sharp decline in overall valuations that remain vulnerable to continued regulatory uncertainty,” he said.
Harvest shareholders will now avoid dilution from the proposed Verano deal, and Harvest might avoid what would have been further cash burn from Verano operations, said Regan at Investor Intelligence.
Harvest Health trades on the Canadian Securities Exchange as HARV. Shares were down more than 10% after the termination of what Harvest and Verano called a “business combination agreement” was announced.
Nick Thomas can be reached at firstname.lastname@example.org
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