Harvest Health has price target cut at AltaCorp Capital

With the Verano deal now terminated, US cannabis play Harvest Health and Recreation (Harvest Health and Recreation Stock Quote, Chart, News CSE:HARV) looks to double down on its key states of Arizona, Florida, Maryland and Pennsylvania.

But without Verano, the stock’s price target needs to be lowered on HARV, according to AltaCorp Capital analyst Kenric S. Tyghe, who commented on the cancelled merger in an update to clients on Thursday.

Harvest Health and Verano mutually announced the termination of their agreement on Thursday, saying that the merger —agreed to last April and one which would have resulted in one of the largest cannabis companies in the United States, with HARV purchasing Verano for $850 million— wasn’t going to come to pass before an undisclosed deadline.

The companies cited regulatory hurdles and a poor capital market climate as cause for the termination, which comes with no penalties for either side.

“Prolonged obstacles in meeting requirements for state and local regulatory authorities needed to transfer ownership and operational licenses, adverse capital market conditions, a challenging environment for asset sales, all contributed significantly to the decision not to move forward with the pending acquisition,” read the joint statement from Harvest Health and Verano.

For his part, Tyghe pointed to the regulatory requirements to meet anti-trust concerns from regulators, especially the divestiture of assets by both parties, as a key problem, both because they would have required HARV and Verano to sell off chunks at firesale prices and because the divestitures, in some states, would effectively put the companies back at the starting line vis a vis regulatory approvals in certain states.

At the same time, Tyghe said the two companies could very well give the merger another go further down the road.

“Given the clock was ticking on the deal termination deadline and the fact government and regulatory bodies have been effectively shut down in key states due to the virus pandemic, this was a race that couldn’t be finished in the allotted time. We believe that the teams remain on very good terms (some of the key personnel who had already transitioned will stay in place), and that this transaction could ultimately be revisited when market and macro conditions improve,” Tyghe wrote.

The analyst has lowered his estimates for HARV based on the termination, now calling for fiscal 2020 revenue and adjusted EBITDA of $341 million and $84 million, respectively, and for fiscal 2021 revenue and adjusted EBITDA of $496 million and $141 million, respectively. (All figures in US dollars unless where noted otherwise.)

Ahead of HARV’s fourth quarter 2019 results due on April 7, Tyghe said he is expecting Q4 revenue and adjusted EBITDA of $45 million and $6.1 million, respectively.

“While we are mindful that Harvest’s team could remain in the penalty box for a period, we believe that Harvest’s portfolio and positioning in key states supports a premium valuation,” Tyghe wrote.

With the update, Tyghe has reasserted his “Outperform” rating for HARV and dropped his one-year target from C$10.50 to C$6.00, which at press time represented a projected return of 355 per cent.