Does TerrAscend's Acquisition Of Gage Growth Dilute Other Parts Of The Company?

The month of September began with news of TerrAscend TER TRSSF signing a definitive agreement to acquire Gage Growth Corp. GAGE in an all-stock deal for approximately $545 million.

While the news would seem like a definitive step up for the company, a new report by Cantor Fitzgerald is causing those bullish on TerrAscend to raise their collective eyebrows.

Cantor stayed Overweight, but lowered its 12-month price target to $8.65 from $10.50, "after reducing legacy business estimates and factoring in the Gage acquisition.”

Analyst Pablo Zuanic said the Gage acquisition “adds about 30% to combined company sales (based on 2Q21 reported data), and will increase the TerrAscend common share count by about 41% (before factoring in TRSSF derivatives).”

The analysis said that given the fragmented nature of the Michigan market and less compelling economics, the purchase dilutes other parts of the company’s investment story, like high exposure to New Jersey and/or its wholesale leadership in Pennsylvania.

“We are further lowering our 2H21 estimates for the legacy piece, following management commentary in the 2Q call in mid-Aug,” wrote Zuanic, explaining that in the earnings call pertaining to the second quarter, TerrAscend management expressed that some issues in Pennsylvania and New Jersey would also be a factor in 3Q and 4Q.

The situation in Pennsylvania could further impact margins “primarily due to the temporary reduction in yields of quality flower caused by the ongoing capacity expansion” in that state.

“This also relates to the company’s decision to increase the allocation of branded products to its own Apothecarium dispensaries in New Jersey, in anticipation of increased demand in an adult-use environment,” Zuanic wrote.

Edit: TerrAscend representatives confirmed via email that, as per their press release dated September 1, 2021, Gage shareholders will hold approximately 19.8% of the issued and outstanding pro forma TerrAscend Shares (on a fully-diluted as-converted basis).”

Lead image by Ilona Szentivanyi. Copyright: Benzinga.