Verano Steals New York License (OTCMKTS:VRNOF)

Despite major catalysts in the U.S. cannabis sector, most MSO (multi-state operator) stocks trade at yearly lows. Even with a New York license catalyst, Verano Holdings (OTCQX:VRNOF) was able to acquire Goodness Growth Holdings (OTCQX:GDNSF) for only $413 million. My investment thesis is ultra Bullish on the MSO based on this deal providing a key license to the New York cannabis market.

Cheap Deal

Goodness Growth was a beaten down MSO trading below $2 per share. The company has a one of only ten vertically-integrated licenses in New York plus one of only two vertically-integrated licenses in Minnesota with a combined 12 open dispensaries in those key states.

One can argue that the recreational cannabis license for New York alone was worth close to $200 million. Harvest Health recently sold a Florida license for $5x million. Florida has 22 vertically-integrated licenses with unlimited stores while the Sunshine state is forecasted to have half the market size as New York. MarketWatch quoted the value for a New York State medical cannabis license at roughly $250 million to $400 million in stating why MedMen Enterprises (OTCQB:MMNFF) wants to terminate their deal with Ascend Wellness (OTCQX:AAWH).

Each Goodness Growth shareholder gets 0.22652 shares of Verano for a total deal value of $413 million. The transaction currently values Goodness Growth at $2.49 per share with Verano trading at $11. The deal is interesting in that the Goodness Growth BOD wants to convert their shares into a position in Verano to ride the future growth of the combined cannabis company.

Goodness Growth operates 18 active dispensaries, five cultivation and processing facilities and owns several cannabis product brands. The company mostly offers Verano access to the New York, Minnesota and New Mexico markets.

Of course, the deal was done mainly for access to the New York market. Analysts estimate New York will reach a market size topping $5 billion after recreational cannabis is fully implemented following state approval last year. According to numbers quoted by Verano, BDSA estimates the New York market will grow from $111 million in 2020 to $2.9 billion by 2026 with recreational cannabis unlikely to start until at least 2023.

Goodness Growth already has 4 operating medical dispensaries and a new indoor cultivation facility with the option to open 4 adult-use dispensaries upon legalization. Clearly, Verano is getting more than just the New York license in acquiring the small MSO.

The company reported Q3’21 revenues of $13.4 million and analysts were forecasting 2022 revenues of $100 million. Goodness Growth guided to 2022 revenues of $100 to $120 million with an adjusted EBITDA of $20 to $30 million.

Verano is paying only 4x sales targets and just 16x the midpoint of adjusted EBTIDA targets. These numbers are based on neither key New York or Minnesota markets rolling out recreational cannabis where sales will easily double and even possibly triple considering the one analyst with 2024 guidance on Goodness Growth has revenue up at $440 million.

Rolling Into Verano Shares

Verano is coming off a tough quarter where the large MSO ran into regulatory issues in several states. The company missed Q3’21 analysts estimates by a wide $13 million, yet Goodness Growth wants their shares rolled into Verano.

The stock has a market cap in the $3.7 billion range. Verano trades at ~2.5x 2023 revenue estimates of $1.5 billion. Any boost from New York recreational cannabis sales would reduce this already low multiple.

One of the biggest concerns is that Verano has underspent on SG&A expenses to build up large EBITDA margins. The purchase of Goodness Growth with an EBITDA margin likely to hit 20% in 2022 and the company guiding to a long-term margin dip of 1,000 basis points could help normalize the current high margins to more reasonable levels. The biggest question remains on whether Verano is spending enough on sales and marketing to build brands for the long term.

Takeaway

The key investor takeaway is that the current stock valuation and the upside of purchasing a New York license on the cheap makes the stock attractive. Verano has substantial upside from a rebound in beaten down MSO stocks plus any upside from proving the company can maintain superior adjusted EBITDA margins.

Investors should use recent weakness to build a position in Verano.