Everyone is Moving to Florida

Trulieve is the champion of cannabis in Florida with about a 50 percent market share.  There are 14 active licensees in Florida and Trulieve (TCNNF) sells nearly as much as the other 13 players combined, and it does that does that with only a quarter of the dispensaries in the state.  There are other major cannabis companies in the state, but none has been able to challenge Trulieve in a serious way.

That is not stopping new entrants from setting up to challenge Trulieve. In the past few weeks, four separate companies have made a move into Florida, and more will follow. 

The recent moves are by Cresco Labs (CRLBF), Ayr Strategies (AYRWF), Verano, and Cookies, and each has a different story of how it got to Florida. 

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Cresco is entering Florida for a second time.  In 2019, Cresco announced that it was acquiring VidaCann of Florida. Unfortunately, declining stock prices and the capital drought of 2019 occurred before Cresco could close the transaction and it was eventually abandoned. The initial deal was for $120 million.  At the time, VidaCann operated 7 dispensaries (it has 14 now).  This time, Cresco is hoping to buy Bluma Wellness (BMWLF). Cresco is paying $210 million, once again for a company with 7 operating dispensaries.  With that pricing, I think it’s fair to say that asset prices in Florida have recovered somewhat from the lows.  On the other hand, Cresco stock is at an all-time high, 25% higher than it was when it announced the VidaCann deal.

I think it’s fair to say that asset prices in Florida have recovered somewhat from the lows.

Ayr Strategies is going into Florida in an even bigger way.  It is buying Liberty Health Sciences (LHSIF), which operates 28 dispensaries.  The larger footprint comes with a larger price; Ayr is paying $290 million based on the share price at the time of the announcement. Ayr’s stock has rocketed since then, and at this writing the deal price is closer to $375 mm.

Notably, neither the Cresco nor the Ayr transactions has a cash component.  They are both share-for-share purchases of existing public companies.

Verano, a privately held multistate operator, is buying Alt-Med, which jockeys with Surterra Wellness for second position in Florida cannabis sales. The resulting company is slated to go public by reverse merger soon. Since Verano is privately held, it is tricky to put a valuation on the deal, but I share some thoughts below.

And then there is Cookies.  Cookies was founded by one of the most successful growers in the cannabis business and the musician/entrepreneur Berner.  Cookies is privately held, so you don’t read much about the company from financial types except when one of the public companies is lucky enough to enter into a partnership with Cookies.  That’s a shame, because Cookies has been successful wherever it has gone. 

Since Trulieve has a history of partnering with good brands, I thought Cookies might appear in Florida in Trulieve stores.  However, Berner had another idea.  Cookies has purchased a license in Florida from one of the dormant licensees and will build a business in Florida from scratch.

Valuation

Are these acquirers overpaying or are they getting a deal? That depends on how they do with their assets.  Both of the public companies being acquired are priced at a discount to Trulieve as a revenue multiple and on an EBITDA multiple for Liberty (Bluma has not reported a positive EBITDA quarter yet). But of course, Trulieve deserves a premium valuation because of its dominant position in the state and its coming revenues from other states like Pennsylvania, Massachusetts, and California.

Liberty Health is something of a fixer-upper. It was an early entrant in Florida but has not had nearly the success Trulieve has seen.  It has half Trulieve’s EBITDA margins and a third the sales per store.  Ayr will have its work cut out for it. Liberty does have fairly large dispensary footprint and a lot of cultivation area to work with. It wouldn’t take all that much of an operational improvement to make the acquisition look incredibly cheap. Based on Ayr’s stock price since the transaction was announced, the market seems to think Ayr can turn Liberty around. A large equity issuance barely put a dent in Ayr’s recent run.

Bluma started operations later and did not record its first revenues until the third quarter of 2019. As a newer entrant, it is not fair to apply traditional multiples to the business.  With a small store base and a smallish cultivation footprint, Cresco is buying the opportunity to build what has successfully built in Illinois, with one exception.  There is no such thing as wholesale distribution of cannabis in Florida, and Cresco has excelled at that part of the business. Cresco has also excelled at branding and educating medical patients, both key considerations in Florida, so it’s not as if the company is abandoning its expertise to enter the state. Like Ayr, Cresco has seen its stock increase since it announced its transaction, despite an equity issuance.

The Verano deal is difficult to value just yet.  The selling shareholders will receive $35 million in cash and they will own 22.5 percent of the resulting company after the reverse merger but before a coming issuance of stock, so the valuation will depend on how the new Verano stock trades. The AltMed Florida properties, which do business under the MüV name, are the stars of the recent deals. MüV has twice the revenues of Liberty despite having only one more dispensary and profitability levels approach those of Trulieve.  For illustrative purposes, I assigned a 6 multiple of annualized revenues to the transaction, which brings the value to $750 million.  With an estimated $120 million in cash and an already-successful Florida operation, Verano is in the best position to make a big splash quickly.

The Cookies transaction is impossible to value, of course.  What it is buying is just the license, which gives the Cookies team to build its operations from scratch. It has no legacy of disappointing customers, no history of bad products, no bad store locations.  Cookies may well have got the best deal of all!

Cookies may well have got the best deal of all!

What did Cookies pay? The seller previously agreed to sell its license to a different buyer for $48 million in the middle of 2019, a transaction which did not close.  More recently, Green Growth Brands transferred its Florida license to its lenders in satisfaction of just $20 million or so in debt. If the license traded at less than that value, it could be that Cookies got the best deal of all!

Who is in Florida, and Who is Not?

Most of the larger cannabis multi-state operators now have a presence in Florida, as do some of the smaller MSOs and several private companies. 

Among public MSOs not in the state, Red, White & Bloom has publicly stated it intends to enter the state. Florida is not among the states Acreage is allowed to enter under its revised agreement with Canopy Growth. Florida’s mandatory vertical integration makes the state a difficult fit for Planet 13. 

Two of the public companies with Florida operations deserve a note. Cansortium (CNTMF) has operations or licenses in three states but the bulk of its revenues come from Florida. That company could be the next target, or it could try to be a buyer of assets in other states with an eye toward being the next big MSO. MedMen’s (MMNFF) Florida operations have been trouble for the company, with locations having to close because of insufficient inventory. Florida can be an important state for MedMen if it successfully rebuilds its operations there, but the company has a lot of calls on its attention and its capital.

Bankrupt Green Growth Brands (GGXBF) has transferred its license to its lender.  Expect that license to find an operating buyer soon. There are seven non-operating licenses in Florida in addition to Cookies so if there are other potential sellers a sharp buyer could get a bargain.

What’s Next?

Finally, is all of this a challenge to Trulieve’s Florida dominance and its resulting lofty stock price?  Perhaps, but I think it’s unlikely.  Curaleaf and Green Thumb have both built big shares in multiple states but have not seriously challenged Trulieve. More likely is that the Florida medical cannabis market will increase its already impressive growth rate. What all of these companies are buying is the eventual recreational market in Florida, which will be just monstrous when it happens and tourism returns.