Two weeks ago Grizzle reported on the alleged falling out between Harvest Health (CSE: HARV, OTCQX: HRVSF) and California cannabis company Falcon International.
Harvest originally planned to purchase Falcon to further its ambitions in the largest U.S. cannabis market, but when Falcon failed to provide Harvest with audited financial statements as required in the deal terms, Harvest decided to walk away from the merger.
Today news broke that Falcon International is fighting back, launching a counter-suit seeking a $50 million breakup fee.
Falcon is also contending they won’t be returning any money advanced to them by Harvest in advance of the deal closing.
$50 million is a significant sum for Harvest to pony up with the company’s cash balance sitting at only $100 million as of December with another $50 million available through a short-term lending facility.
Harvest spent $85 million of cash last quarter and can scarcely afford to pay out such a large sum to Falcon.
Will the Deal Happen After All?
It feels like Harvest looked at the tough operating environment and deterioration in market fundamentals in California and decided to walk away from the deal.
A lot has changed since February 2019, and the old merger terms probably look far too rich for Harvest seeing as the deal was for a set value of Harvest shares which are now down more than 50% since that time.
Harvest cited technicalities, such as the lack of audited financials, to try and get out of the purchase without paying a breakup fee.
Now Falcon is playing hardball and we wonder if the end result will be that the merger happens anyway.
Harvest can scarcely afford to pay $50 million and Falcon looks ready for a fight.
We think there is a chance, though less than 50% that the parties end up negotiating revised terms and complete the merger after all.
Harvest already committed to paying shares instead of cash so the merger won’t cause any liquidity problems, it will simply dilute shareholders who are already used to it.
With California proposing a cut to cannabis taxes and other measures to jumpstart the legal industry there, it may make sense for Harvest to complete the deal, though on revised terms.
This story is just beginning to play out and we will be following closely with popcorn in hand to see if Harvest and Falcon live happily ever after or if what seemed like a buddy flick at first turns into a financial horror film.