High Tide’s new deal is a winner, says Echelon Capital

The new merger between Meta Growth (Meta Growth Stock Quote, Chart, News TSXV:META) and High Tide (High Tide Stock Quote, Chart, News CSE:HITI) should be good for High Tide shareholders, according to Echelon Capital Markets analyst Andrew Semple, who reviewed the deal in an update to clients on Monday.

The cannabis retail space in Canada just got a little less crowded as two retailers, Meta Growth, which operates dispensaries under the NewLeaf Cannabis and Meta Cannabis banners along with an e-commerce platform, and Calgary-based High Tide, which has both retail and wholesale operations for smoking accessory products, announced last Friday a merger.

Shares of High Tide spiked on the news on Friday, with the agreement calling for High Tide to issue 0.824 shares for every Meta share, with High Tide shareholders retaining 54.375 per cent of the pro forma entity. The consideration for Meta shareholders represents a 14 per cent premium based on market prices for High Tide and Meta shares.

The combined entity will be known as High Tide, will be led by the High Tide executive team, with two of Meta’s independent board members joining the board. Both boards of directors unanimously approved the transaction and the combined entity will apply to be listed on the TSX Venture exchange.

“The combination with META is a watershed moment in High Tide’s evolution as we become Canada’s largest and strongest cannabis retailer. Over the last decade High Tide has built a strong foundation for sustainable growth, and this transaction is another example of our ability to execute on strategy with our customers and shareholders in mind,” said Raj Grover, High Tide’s president and CEO, in a press release.

In his report, Semple said he’s bullish on the deal for High Tide shareholders.

“The merger will combine two of the leading cannabis retailers into Canada’s largest cannabis retailer, with 63 pro forma branded store locations and $133 million pro forma annualized revenue based on each company’s most recent reported quarter. High Tide would also have a meaningful head start in the attractive Ontario market, where it would lead the independent cannabis retailers with ten branded cannabis stores, eight of those expected to be corporate owned pending completion of announced acquisition agreements,” Semple wrote.

“High Tide, bolstered by the Meta assets, will be well situated to benefit from an improved market position, as well as a more prominent capital markets profile from a larger market capitalization, improved trading liquidity and a transition to a TSXV listing.,” he said.

The analyst pointed out that High Tide expects $8 to $9 million in cost synergies achievable through the merger, while he claims the combined company will have a more robust data analytics service with a wider network for its membership programs.

Semple said the deal gives High Tide shareholders a much-improved capital situation, where Meta had access to about $23 million in capital as of its last reported quarter. The new resources mean that High Tide won’t need financing over the next 12 months, according to Semple.

“We also believe there is reduced execution risk to store openings timelines for the combined entity. Whereas we called for 95 store openings by F2025 between the two separate companies, we now look for the combined Company to open 81 stores, suggesting a lower hurdle to achieving our operational/financial forecasts,” Semple said.

Semple’s new estimates have High Tide generating fiscal 2020 revenue and adjusted EBITDA of $80.5 million and $7.2 million, respectively, and fiscal 2021 revenue and adjusted EBITDA of $207.7 million and $25.7 million, respectively.

With the update on High Tide, Semple has reiterated his “Speculative Buy” for HITI while upping his target from $0.35 to $0.50, which at press time represented a projected one-year return of 178 per cent. In a separate report on Meta Growth delivered on Monday, Semple changed his recommendation on META from “Speculative Buy” to “Tender.”