SPAC strategy includes vertical integration and high-end indoor flower cultivation

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, SPAC strategy includes vertical integration and high-end indoor flower cultivation

Greenrose Acquisition Corp. sought out companies that grow exceptional flower, such as Shango, below. Courtesy Photo

Greenrose Acquisition Corp.’s investment strategy hinges on cultivation.

As a special purpose acquisition company, or SPAC, Greenrose completed an initial public offering of 15 million shares in February 2020 with plans to use the $150 million in gross proceeds to acquire cannabis companies.

In March, the SPAC signed contracts to buy four marijuana businesses. Between them, the companies—Connecticut-based Theraplant, The Health Center in Colorado, Arizona-based True Harvest and Oregon-headquartered multistate operator Shango—operate in seven states, four of them vertically integrated.

The aim, Greenrose CEO Mickey Harley said, is to become vertically integrated in the other three states. That means adding cultivation and manufacturing in California, where Greenrose has retail operations, and adding retail in Arizona and Connecticut, where the company has cultivation and manufacturing operations.

Seeking top-shelf flower

Greenrose sought out acquisition targets that excel at producing premium flower.

“We wanted them to be cultivation-centered because we think great flower at reasonable prices will always have market share. And we’ve chosen the four companies because we think they are outstanding cultivators,” Harley said.

Harley sees cultivation as a sector conducive to moats that allow a company to differentiate itself from potential rivals.

“When we first started looking at this issue three, four years ago, we wanted to understand where you can draw a moat and, from a business perspective, entrench yourself. Low-end flower and extracted products are commodities,” he said. “But when you look at higher-end flower, indoor flower, it’s not a commodity.

“You need to be able to grow outstanding product and cure it and process it in a way that consumers find unique and are willing to pay a premium for. And I think that’s a very difficult skill to find. We focus our acquisitions around acquiring that skill. And we will also develop that skill internally,” Harley added.

Free cash flow

Many investors are willing to bet on companies—especially younger ones—that aren’t profitable or even generate revenue. Not Greenrose.

“We wanted to make sure that these guys are generating free cash flow, which they all do,” Harley said of the companies’ cash profit after accounting for maintenance and operations.

As Greenrose adds assets, including businesses to complete its vertical integration ambitions in Arizona, California and Connecticut, Harley will continue to look for those with free cash flow.

Shared vision

When Greenrose examines leadership teams, a key attribute is whether they are “like-minded people that we can work with” and “that we have a similar vision of the industry.”

Cannabis experience is important, too. “We want to manage teams that have long experience in the cannabis industry and that have proven track records. … Most of the management teams have backgrounds prior to entering cannabis in something else. That’s always helpful, but we wanted to make sure that the guys had deep cannabis track records.”

Follow the links on this page to learn what other investors look for when making funding decisions.