When Wall Street veteran and agriculture entrepreneur Mickey Harley considered getting involved in the US cannabis industry he says he quickly realized it was 'too good' an opportunity to miss.
Harley is the CEO of a Special Purpose Acquisition Company (SPAC), Greenrose Acquisition Corp, which is poised to buy, in a deal valued at US$210 million, four established plant-touching cannabis firms to create a major multi-state-operator (MSO) with big growth potential and cash flow, and with a presence in seven US states.
In over 35 years of investing, Harley told Proactive in an interview, he has never seen - and he doubts he will see again - the sort of opportunity that now exists in the US cannabis industry.
"You get growth, you get cash-flow, you get barriers to entry all at the same time ... you're never going to see that again," he said.
And with The Greenrose Holding Company Inc, the name Greenrose Acquisition Corp will assume once the acquisition transaction closes, he hopes to have an “A-plus” operator in the massive and rapidly evolving playing field that is the US cannabis space.
No stranger to cultivation
Harley is no stranger to cultivation and when he left Wall Street, he transitioned full time to the tree nuts and organic berry orchard business - a sector, in which he had previously been an investor.
Then about four years ago, when friend Brendan Sheehan, now executive vice-president of strategy and acquisitions at Greenrose, suggested he get involved in cannabis, he says he saw many similarities between that industry and the orchard business.
These included a lack of capital, the importance in cultivation expertise, the need for tight supply chain management, and the fact that if a company can vertically integrate an operation - to run right through from cultivation to retail - it drives higher margins.
Many big agricultural products cannot be vertically integrated due to legal or structural issues but berries and cannabis can be, explained Harley.
Add this to the highly fragmented cannabis industry across America and the legal barriers to entry, and he realized this was a 'dynamic' investment opportunity.
Greenrose has - after a rather longer timeline than Harley would have liked - now struck definitive deals to acquire four. what he calls "outstanding", companies to form a platform, which boasts 300,000 square feet of cultivation capacity capable of producing around 120,000 pounds of flower a year.
The target firms are Connecticut-based cultivation group Theraplant and Colorado-focused Futureworks LLC, doing business as The Health Center. The SPAC is also set to buy multi-state operator Shango Holdings, which has recreational and medical dispensaries in Oregon and Nevada, and True Harvest, which is an Arizona-based cultivator, also run by Shango.
The Greenrose team, which has largely worked together before, decided on the special purpose acquisition company model because at the time, there were very few cannabis SPACs about, and it was a way of quickly raising the large amount of capital needed.
In addition, the majority of US investment groups can't put money into cannabis as it remains federally illegal.
The idea is to integrate the outstanding operating management of the acquired companies into the current Greenrose corporate team. Harley sees the corporate team as a kind of a “service organization” to the operating team coming on board.
"I'm excited about all four for very specific reasons," said Harley. "On the East Coast, Theraplant is one of only four cultivators in Connecticut which is flipping to a recreational model. They are by far the best cultivator in the state by any measurable metric and that market is about to explode."
Theraplant, he noted, has also just doubled its capacity so expects to sell much more cannabis this coming year at prices reflecting a tightly-supplied market.
Growing great cannabis is at the heart of the Greenrose strategy.
"Best flower at best price is going to ultimately win the game and you're not seeing that right now. A lot of the MSOs enjoy a very, very sheltered market and so they can put anything on the shelf and it's going to sell. That's not always going to be the case in the future," said Harley. "We've got, I think, between The Health Center, Shango and Theraplant, the best team of cultivators that this industry is going to see."
The Health Center, which Harley believes is the best operator in the state of Colorado, should also allow the group to 'roll up' the market in that state, which is highly profitable but fragmented.
When the acquisitions fully close, Greenrose will immediately be cash flow positive and is guiding for pro-forma revenue for 2021 of US$115-135 million and adjusted EBITDA of US$45-54 million. Due to the recreational market in Connecticut coming online next year, it has also lifted its guidance for 2022 revenue to up to US$295 million from US$230 million previously, and adjusted EBITDA for 2022 of up to $135 million.
The combined group's first aim will be to go deeper into those markets it already has through the four companies, particularly expanding the retail footprint, explains Harley.
In Connecticut that could mean winning new licences or acquiring one of the already 18 dispensaries there via M&A. Similarly, this 'buy and build' approach will be used in Arizona, Michigan and Colorado, said Harley.
Key financing deal
In August, the firm closed a key financing deal with Sunstream Bancorp for up to US$103 million giving it the means to now fund and close the deals. The investment comprises US$78 million in a loan facility and US$25 of convertible notes.
With the closing, and assuming no redemptions of Greenrose stockholders, it will have up to US$276 million to fund its ambitious growth strategy.
"They are a fantastic partner (Sunstream) and that's how we view them .... we talked to a lot of different finance teams and their ability to understand what we're doing, analyze it and move rapidly, just blew everyone away," said Harley.
So things are well poised for Greenrose to scale up very rapidly and it could well be a company to keep an eye on in coming years.
"We'll generate earnings and we'll generate free-cash-flow and those are metrics that are very easy to understand and we will continue to do that because the assets we're buying do that," Harley concluded, "The trick will become making right decisions on future growth."
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