In an utterly unsurprising move, Trulieve ($TRUL) did exactly what an incredibly ambitious state-level ‘superstar’ would do: it went out and bought itself an MSO in Harvest Health ($HARV).
There’s a fair bit to comment on here, let’s start with the deal itself. The headlines touting it are simple enough:
The aggregate deal is said to be worth around $2.1B
The entirety of $HARV’s share structure is being purchased. From my Q3 F2020 Structure:
That share count changed by year end, with 40MM multiple voting shares being converted into subordinates during the 4th quarter:
There’s a note about majority shareholders at $HARV committed to support the agreement. Due to the existence of Supers and Multiples, the reality is that those ‘50%+’ folks (ie: a half dozen $HARV insiders) control 582MM votes out of a total 803MM votes that exist. The common shareholder is, and has always been, irrelevant:
For the total value of the deal, I come in 10% lower than the implied $2.1B USD put out in the press release. With numbers like these though, there’s gonna be variance. Yet despite that 10% difference, I get to within $0.02 of the per share value quoted:
The deal – defacto in terms of both parties respective votes – is contingent on $HARV getting some or all (it’s not specified) of its’ debt restructured:
$HARV’s packing more than a quarter billion in debt (and $50MM in deferred tax liabilities) currently. While $TRUL is reporting some $130MM in debt, $TRUL’s financing includes a large component of optionality. There’s 3MM in warrants that went out with the debt (JUNE/NOV Notes, Note 7 of last financials), which were repriced ($ka-ching!) last June, when $TRUL’s share prices were languishing far below initial strike. The revaluation granted debt holders an incremental ~=$27MM in value at the time. The texture between the 2 company’s debt structuring is distinct. $TRUL’s used a combination of public syndication and a single private placement to establish theirs, as $TRUL has consistently shown preference for issuing ‘fixed’ capital cost.
While $HARV’s got more than a third of their debt in convertibles (‘floating’ capital cost), the remaining mostly in secured promissorys.
I doubt we’ll be able to see what those ‘refinancing measures’ are until the deal is done – there’s not much detail in public documents at the moment. My money would be on $HARV having to crystallize the convertible feature on their debentures and that single Note. From $HARV’s financials:
And that ‘fixed’ versus ‘floating’ theme is a takeaway for me on this entire deal. It’s one-sided: $TRUL set price and conditions, acquiring $HARV using their own equity’s exposure at ‘index’ in terms of ultimate cost. That’s dirt cheap. If $HARV is forced to crystallize the convertible feature, it could be expensive, but $TRUL isn’t going to pay for a dime of it. $TRUL’s got a ‘fixed’ ratio for a floating price for $HARV’s assets, and a pre-defined capital structure up front. If the deal doesn’t become that, $TRUL will simply adjust the share ratio. Also, if $TRUL’s shares go to $20, so be it. Ratio won’t move.
This, is an incredible deal for $TRUL, and a hard hammering of any valuation one could put forward for $HARV.
I see $TRUL’s this in the cost to $HARV for having 185MM super/multiples in their capital structure. If I was a $HARV shareholder, all I’ve received in returns for exposure to the sector is a (temporarily) undefined exposure to the sector. Still, it’s far and away they best deal $HARV ever could have hoped for.
All in all, $TRUL is not only driving the bus, they own it too: $HARV was just told to get on. The quality of the deal for $TRUL is down to the quality of asset valuation their capital team put on $HARV’s assets, and forecasting ability.
The reality is that $TRUL – for all of its’ strength in Fortress Florida™ – is a one-state wonder despite incremental moves into PENN. This deal changes that, and $TRUL will become a real-live full blown MSO.
No matter what’s said, I see $TRUL as having made a big move, but nothing more than this having been a virtual inevitability. $TRUL’s taken out a relatively inept outfit with a string of litigation across 3 states around blown expansion strategies, and has suffered 2 quarters late last year of operational hiccups.
Rather than anticipating a 3-Tier system and staring regulatory risk straight in the face, $TRUL CEO Kim Rivers is consolidating on an existing strategy of verticality and size. As to whether it’s the ‘best’ move, time will tell.
The preceding is the opinion of the author, and is in no way intended to be a recommendation to buy or sell any security or derivative. The author holds no position in $TRUL nor $HARV.