Last week, the rapidly evolving U.S. cannabis industry changed forever when one of the largest U.S. multi-state operators (MSOs), Trulieve Cannabis (TCNNF 0.96%), agreed to acquire a smaller but still substantial peer, Harvest Health & Recreation (HRVSF), for $2.1 billion in stock.

While most large U.S. MSOs have been scooping up smaller private companies and license holders in select states, this acquisition is the largest tie-up in U.S. cannabis history. It also occurs at a historic time, as the U.S. seems to have reached a tipping point regarding the legalization of cannabis across the country.

Given the 34% premium Trulieve is paying, Harvest's stock surged and Trulieve declined on the news. And while Trulieve does seem to be paying a healthy price for Harvest, the transaction could pay off down the road.

Cannabis plants growing towards the sky outside.

Image source: Getty Images.

The acquisition

Harvest shareholders will receive 0.117 shares of Trulieve for every share of Harvest they hold, and will end up with 26.7% of the combined company on a fully diluted basis. While Trulieve has long dominated the state of Florida, Harvest has the leading market share of 15 dispensaries in Arizona, which just commenced recreational sales in January. The combined company will also have a large-scale presence in Pennsylvania, where Harvest's nine current operational dispensaries will add to the six Pennsylvania dispensaries Trulieve just acquired since last summer. It will also add another eight dispensaries in Trulieve's home market of Florida. 



Harvest Health & Recreation

Combined Company





Operational dispensaries




Cultivation and production (square feet)

2.2 million

0.88 million

~3.1 million

2021 Revenue (est.)

$858 million

$379 million

$1.238 billion

2021 adjusted EBITDA (est.)

$379 million

$82 million

$461 million

Data source: Trulieve and Harvest acquisition presentation.

Industry-leading profitability

The resulting company will be roughly as large as Curaleaf Holdings in terms of revenue, but it will be more profitable, with combined 2021 EBITDA estimates for $461 million, good for a margin of 37% -- the highest total adjusted EBITDA and close to the highest adjusted EBITDA margins in the country.

However, consensus estimates are likely underrating the combined company's earnings power this year. Those estimates were made before each company reported strong earnings last week, with Harvest in particular beating revenue expectations by a wide margin. As the company had a number of cultivation projects come online, and with Arizona recreational sales beginning in January, more of that revenue beat flowed to the bottom line. Adjusted EBITDA margins jumped from 13.1% in the fourth quarter of 2020 to 30.3% in the first quarter of 2021. The $26.9 million in EBITDA Harvest made in the first quarter annualizes to $107.6 million, well above current analyst estimates of $82 million.

Well positioned for the future

Florida, Pennsylvania, and Arizona should be highly profitable states for the combined company, as each of those states has limited licenses, and the new Trulieve will have strong leading positions in each. Since cannabis is federally illegal and interstate commerce isn't allowed, economies of scale can only be had within the borders of an individual state.

While those three states will serve as high-profit centers, the combined company will also reach eight other states, most of which are positioned directly adjacent to these core markets -- in other words, the company will operate in 11 states across three regional "hubs" throughout the U.S.

A smiling couple in a field of cannabis.

Image source: Getty Images.

This regional hub strategy has been carefully thought out by Trulieve's management, even though the company can't yet transport cannabis across state lines.

"While we can't transport cannabis across state lines, we can share talent, we can share skillsets and we can have purchasing power for non-cannabis pieces of the supply chain," CEO Kim Rivers told Forbes magazine. "We think about it more as a distribution play." And of course, if and when the federal government decriminalizes cannabis and companies are allowed transport across state lines, the new Trulieve should have a very efficient system.

What's next

The U.S. cannabis space is rapidly evolving, but it's beginning to look more like the consumer packaged goods or alcohol industry -- only with much higher growth. If that happens, the normal competitive advantages of those industries, including distribution power, brand power, and economies of scale, will apply.

Although it paid a hefty 34% premium for Harvest, the new Trulieve looks as well positioned as any to succeed.