AppHarvest thinks its greenhouse process will be competitive with crops grown in open fields.
Agricultural production is big business, but for the most part it isn’t a publicly traded business. That makes some of the processes and companies responsible for putting food on the table impenetrable to many investors. A new company plans to change that—and is making a public market debut via a merger with a special purpose acquisition company, or SPAC. Along with educating Americans about food production, it is looking to shake up how they get their produce.
On Tuesday, Kentucky-based AppHarvest announced a deal to merge with Novus Capital (ticker: NOVS) that values the next-generation greenhouse owner and operator at about $500 million before proceeds. The companies expect the transaction to close by early next year.
AppHarvest CEO Jonathan Webb has a background in building large-scale solar-energy projects across the U.S. Just as he witnessed that newer and more-sustainable form of energy generation disrupt the coal economy in his native state of Kentucky, Webb expects agriculture to experience a similar transition in the coming years.
AppHarvest isn’t talking about disrupting soy, wheat and corn farming. For investors, that is the more familiar part of the agribusiness value chain. After all, billions of dollars worth of soy, wheat, and corn futures change hands on Chicago commodity exchanges each day. And Deere (DE) sells huge combines and tractors to farmers looking to improve output per acre.
“Wheat, corn and soy are low-nutrient, subsidized products—that’s what people think agriculture is,” Webb said in a phone interview. His company instead is focused on produce such as tomatoes, leafy greens, and cucumbers. Those products for the most part are grown in California and South America in open fields. Webb’s approach is to bring production inside.
AppHarvest plans to grow about 23,000 tons of tomatoes and other products in a 60-acre modern greenhouse, with no chemicals and using recycled rain water. It is a capital-intensive idea, but Webb said AppHarvest can achieve 30 times the output per unit of land in the company’s system.
AppHarvest thinks its process will be competitive with crops grown in open fields, but that isn’t the only reason Webb thinks now is the right time for his company. Resource scarcity, concerns about chemicals and pesticides, and a growing global population mean the world needs to produce more food from less land in the near future. “It’s all of the above,” he said when asked about what drives his vision.
Investors and U.S. consumers know how much tomatoes cost at the grocery store, but putting 23,000 tons into context isn’t easy. According to the Food and Agricultural arm of the United Nations, the U.S. produces about 14 million tons of tomatoes annually on roughly 320,000 acres of land. AppHarvest doesn’t need to displace U.S. growers: Most of the country’s tomato consumption is imported.
With tomatoes wholesaling for $1 to $2 a pound, one AppHarvest tomato facility can generate about $50 million in sales, enough to justify the $100 million-plus capital cost, according to the company.
AppHarvest has yet to earn a penny in sales, but it is ready to start planting its first crop of tomatoes in October. Those should be ready to harvest in early 2021, when the company projects it will bring in $25 million in revenue from 60 acres of capacity in year one. It also sees a loss before interest, taxes, depreciation, and amortization, or Ebitda, of $30 million next year.
By 2025, AppHarvest projects it will have a dozen facilities with 540 acres of tomatoes, leafy greens, and cucumbers. Building all that will take additional capital, which CFO Peter Halt said could come from borrowing against existing facilities. For 2025, AppHarvest’s forecast is that it will have $376 million in sales and $106 million in Ebitda.
The majority of the deal proceeds come not from the Novus SPAC but from a $375 million private investment in public equity, or PIPE, funded by institutional investors, including Fidelity and Inclusive Capital. The latter also purchased a $30 million convertible note, which will convert to AppHarvest stock after the deal closes. Including the $100 million in the Novus’ trust, the company expects to have about $500 million in cash to fund operations and invest in building additional greenhouses in the coming years.
Novus went public in May, debuting with units consisting of one common share and one warrant each. That is on the high end for SPACs, and represents greater dilution for shareholders than a SPAC with fewer warrants per unit. Novus’ CEO is Larry Paulson and its chairman is Robert Laikin, both with experience mostly in the telecommunications industry.
Novus stock was down 1.2% to $12.04 Wednesday morning, after jumping 20.8% Tuesday on news of the deal. The S&P 500 and Dow Jones Industrial Average, were up 1.1% and 1.4%, respectively, Wednesday, adding to Tuesday’s gains of 0.5% and 0.9%.
At current levels, AppHarvest is valued at almost $1 billion, based on the pro forma shares that would be outstanding if the deal closes.