$50 million for Harvest to exit Falcon deal?

The dispute between Harvest Health & Recreation and Falcon International over a failed deal continues to heat up, with Harvest now apparently fighting over a $50 million breakup fee and the two heading to arbitration.

Falcon filed a request for dismissal of the Harvest complaint, originally filed Jan. 6. (Falcon’s court filing can be downloaded here and Harvest’s original complaint here.)

The key new information is:

  1. Falcon claims the deal includes a $50 million breakup fee from Harvest to Falcon should “Harvest breach its obligations to provide agreed-upon funding.” This could be a liability for Harvest of another 15 million shares at the current price of $3.28 (CA$4.28) if funded with equity.
  2. Falcon noted that the $47.9 million in convertible loans already provided by Harvest are convertible into Falcon equity at what seems to be the original deal announcement valuations, since the filing notes “the most recent of which is convertible at a $250 million pre-conversion valuation of Falcon.” Harvest and Falcon based the deal structure on Harvest shares at $7.12 (CA$9.33), more than twice the current price. As we noted in our initial analysis, we do not expect Harvest to get its $47.9 million convertible loans back from Falcon, but perhaps the conversion price will be adjusted.
  3. Falcon said it will go to arbitration with Harvest: “Falcon – now that it has notice of the dispute – has agreed to arbitrate the dispute in accordance with the terms of the Merger Agreement.” This seems to be what Harvest was originally trying to do anyway.

It seems the arbitration is a fight over renegotiating or terminating the deal, the payment of the $50 million breakup fee to Falcon and the repayment to Harvest of the $47.9 million in convertible loans and $4.1 million paid personally to Falcon principals Jim Kunevicius and Edlin Kim.

At this point, Harvest could theoretically buy both Falcon and Interurban given that the pending consideration for the Falcon deal is 33.6 million Harvest shares. The consideration for Interurban would presumably be equity as well.

But given that Falcon seems to have been capital-constrained for much of 2019, there might be additional liabilities that Harvest would have to assume – which Harvest might not even know about if Falcon has not provided financials since the fall.

It makes sense for Harvest to pay the breakup fee and walk only if there are additional liabilities in excess of the value of the Falcon operation and the 33.6 million shares needed to close.

These liabilities could be either new loans assumed by Harvest or legal liabilities from alleged “reckless business practices” by Falcon that would list Harvest as a co-defendant in a whistleblower lawsuit.

For investors, this last point on avoiding a lawsuit as a co-defendant is the most uncertain and worrisome liability, and avoiding the overhang on the stock of a trial, a defense and an unknown penalty could easily be worth the $50 million termination fee.

Mike Regan can be reached at [email protected].