The U.S. cannabis industry has seen billions of dollars of acquisitions in recent months, attracting scrutiny from federal trustbusters examining whether planned purchases could quash competition in the emerging marijuana industry.
The U.S. Department of Justice’s review of the deals – including those involving Chicago-based Cresco Labs (CSE: CL; OTC: CRLBF) and Arizona-based Harvest Health & Recreation (CSE: HARV; OTC: HRVSF) – is weighing on cannabis stocks and triggering concerns whether some of the purchases could unravel.
The scrutiny has raised questions about the Justice Department (DOJ)’s apparent acknowledgement of an industry that remains illegal under federal law.
Cannabis companies, as in any other industry subject to detailed antitrust investigation, are required to list revenue amounts under so-called NAICS codes (North American Industry Classification System).
“At first glance, it seems ironic that a federal agency is reviewing transactions in a federally illegal industry, but based on sizable public company involvement and the value of these transactions, it would appear that, by default, these deals would qualify for review,” Jesse Pytlak, equity analyst at Toronto-based Cormark Securities, told Marijuana Business Daily.
The wave of deals includes:
- Cresco Labs’ $823 million acquisition of Canadian firm Origin House (CSE: OH).
- Massachusetts-based Curaleaf’s (CSE: CURA; OTC: CURLF) $1 billion deal to acquire Oregon-based Cura Partners and its estimated $875 million purchase of Chicago-based Grassroots Cannabis.
In several cases, the DOJ issued second requests for information from the companies under the Hart-Scott-Rodino Antitrust Improvements Act of 1976.
The requests can lead to months of additional documentation aimed at determining if deals would violate the law.
“The uncertainty is very injurious to the target business. It is eight or nine months of uncertainty,” Larry Silverman, partner at Miami-based law firm Akerman, told MJBizDaily.
“The mere issuance of these (second requests) kills a heavy percentage of these deals.”
Here’s more about how the requests can affect businesses:
- Thousands of merger or acquisition deals are proposed every year, but usually less than 5% ever receive a second review notice – which can take months, and millions of dollars, to resolve.
- The extended uncertainty can negatively impact a company’s relationships with its employees, customers, suppliers and competitors.
- Faced with those additional risks, buyers and sellers may choose to abandon proposed deals.
Instances of companies receiving a DOJ second request involve the planned Cresco/Origin House and Harvest Health/Verano Holdings deals.
A MedMen/PharmaCann transaction also has reportedly received a request – though the companies did not confirm.
Target companies in deals including Cura Partners and Origin House declined to comment.
PharmaCann, an Illinois-based multistate medical marijuana company that’s the subject of a $682 million acquisition by California-based MedMen (CSE: MMEN; OTC: MMNFF), said it is looking forward to closing the transaction “in due course.”
MedMen – whose stock declined from 9.02 Canadian dollars ($6.86) a week after the PharmaCann deal was announced to well under CA$3 a share now – did not respond to inquiries.
Cannabis companies are moving forward with acquisitions, confident deals will close – though delayed.
For example, Harvest Health announced March 11 it will acquire multistate operator Verano Holdings in what was then estimated as an $850 million deal.
Harvest subsequently received a second request from the DOJ, Harvest’s Christine Hersey, director of investor relations, confirmed.
Instead of closing the deal in the first half of 2019 as originally predicted March 11, Harvest is now aiming for the end of this year, she said.
From a high of almost CA$14 a share shortly after the deal was announced, Harvest stock is now trading closer to CA$6.80.
“Most of the sector is down from its earlier highs,” Hersey said. “The concerns have impacted all the companies that have acquisitions pending.”
While other factors contribute to the sector decline, it’s clear the very notion of federal authorities inserting themselves into cannabis regulation is a drag on stocks.
Brett Hundley, senior analyst at New York-based Seaport Global, wrote in a note July 23 that selling pressure is in part due to “regulatory disappointment.”
Andrew Kessner, equity research analyst at New York-based William O’Neil, wrote in a note after Curaleaf’s announcement it is buying Grassroots:
“One of the key components weighing on U.S. cannabis stocks has been the DOJ’s requests for additional information related to pending acquisitions by other MSOs.”
Cresco, which reported June 10 its planned acquisition of Origin House is subject to a second request from the DOJ, saw its stock dip from a recent high of CA$17.75 about three weeks after the April 1 deal announcement to CA$10.59 on July 30.
Its target, Origin House, was valued at CA$12.98 April 29 but trading at just CA$7.26 on July 30.
The original $823 million value of the deal was predicated on valuing Origin House shares at CA$12.68.
While the deal was originally expected to close at the end of June, Cresco is now aiming for Oct. 31, according to a recent company filing.
The reality of antitrust issues may be overblown, some experts said.
Kessner at William O’Neil wrote in his note that regional regulatory concerns are potentially more of an issue.
“We’ve also observed state lawmakers and regulators becoming increasingly aware of, and averse to, the idea of ‘Big Marijuana’ dominating state markets,” he wrote.
“We view this dynamic as a much larger risk to the growth potential for MSOs than antitrust reviews or other federal level issues.”
Evan Eneman, CEO of professional services company MGO/Ello Alliance, welcomed the interest from federal authorities but said the actual risk is low.
His colleague, Hershel Gerson, CEO of new cannabis investment bank Ello Capital, said any antitrust concerns were largely unfounded because no interstate commerce was involved.
“Things are so regionalized that it is hard to make an argument that someone is making a monopoly,” he said. “There is a lot of maturing to do in this industry.”
And Curaleaf’s announcement of the Grassroots acquisition calmed the market, too. Curaleaf management expressed confidence the footprint of the deal would not raise antitrust concerns.
However, there is a long way to go, and target companies in particular may just get to a tipping point where the deal is not worth following through on.
With stock prices continuing to have a pall cast on them, target companies may feel a combination of the uncertainty and declining values of any deal may detract from the bluster of comments in the wake of multimillion-dollar-deal announcements.
Craig Behnke, equity analyst at MJBizDaily, and Jeff Smith, MJBizDaily’s legal and regulatory reporter, also contributed to this report.
Nick Thomas can be reached at email@example.com
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