A subsidiary of Toronto-based Cronos Group purchased an option to acquire approximately 10.5% of PharmaCann, one of the largest privately held cannabis companies in the United States, for $110.4 million (134 Canadian dollars).

The deal, if executed, would give Cronos a toehold in the U.S. with which to expand and follows a similar optional agreement between Canopy Growth and Acreage Holdings.

According to a news release, Cronos’ option is based on several factors, including:

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  • The status of U.S. federal cannabis legalization.
  • Regulatory approvals, including in states where PharmaCann operates.

Chicago-based multistate operator PharmaCann has six production facilities and 23 dispensaries across six states, including Illinois, Maryland, Massachusetts, New York, Ohio and Pennsylvania.

In a note to clients, Piper Sandler analyst Michael S. Lavery said U.S. federal legalization expectations could help drive deals like this one.

“As expectations for federal legalization adjust to legislative reality, Canadian LPs have to look for ways to prepare besides just waiting for the gates to the U.S. to open,” he wrote.

“We believe this motivation is behind Cronos’ approach to the PharmaCann deal, and likely fuels other deals to come, too. In the absence of organic growth opportunities near-term, partnering with key existing strategic operators gets increasingly important.”

However, the analyst said that the level of regulatory change needed to drive meaningful revenue growth from deals such as this could still take several years.

“We were attracted to PharmaCann as an investment because of their disciplined capital allocation, strong track-record and compelling licensed manufacturing and retail footprint,” Cronos CEO Kurt Schmidt said in a statement.

The $110.4 million was deposited by Cronos via a third-party agent to be distributed to PharmaCann shareholders, according to the release.

“At Cronos Group’s election and following its exercise of the option, Cronos Group and PharmaCann will enter into commercial agreements that would permit each party to offer its products through either party’s distribution channels,” the release states.

The two companies will enter into an investor-rights agreement that provides Cronos with certain governance rights, including a board seat or board observer subject to certain conditions, following the exercise of the option.

The release also said Cronos Executive Chai Michael Gorenstein and Jason Adler, a director, each have an indirect interest in PharmaCann via their interest in a fund affiliated with PharmaCann stockholder Gotham Green Partners.

A Cronos special committee composed of independent directors was formed to make a recommendation to the board regarding the conditional deal as well as other opportunities in the U.S.

The deal has been approved by the respective boards of PharmaCann and Cronos.

Cronos trades as CRON on the Toronto Stock Exchange and the Nasdaq.