A $680 million merger just blew up in a ‘surprise’ and experts say it’s a sign of pain to come for cannabis dealmaking

  • MedMen terminated its $682 million merger with PharmaCann on Tuesday, in a move one analyst called 'surprising.'
  • The merger's cancellation points to a challenging dealmaking environment in the cannabis industry, as the sector has declined close to 50% in the past few months.
  • Business Insider spoke to lawyers, bankers, and analysts who work with cannabis companies about what this means for the industry.
  • Click here for more BI Prime stories and subscribe to our weekly cannabis newsletter, Cultivated

It's been a tough week for publicly traded cannabis companies, capping off a difficult few months for the sector.

In a surprise move on Tuesday, MedMen said it was pulling out of its proposed all-stock merger with PharmaCann. The merger, which was first announced in October of last year, would have created one of the largest US cannabis companies, and was valued at $682 million when it was announced.

Slumping share prices and consistent headwinds in the cannabis industry — namely, fear over illnesses caused by THC vapes and the slowing progress of marijuana legalization in the US — have made for a challenging dealmaking environment, according to bankers, analysts, and lawyers working with cannabis companies that Business Insider spoke with. In the last 6 months, the Horizons Marijuana Life Sciences Index ETF, a fund that tracks cannabis stocks in the US and Canada, has slipped close to 50%.

"The initial wave of investors that went after this market has been tapped out or exhausted," Marc Hauser, the vice chair of law firm Reed Smith's cannabis team told Business Insider in an interview. "Companies are having a much harder time raising capital than just twelve months ago."

Read more: Here are the top bankers raising money, putting together deals, and raking in millions in the global cannabis industry

For his part, MedMen CEO Adam Bierman cited the challenging capital markets environment for cannabis companies, and the need to change up strategies as the reasons for the deal's termination. The company also pushed out its CFO, Michael Kramer, and replaced him with Zeeshan Hyder.

It's MedMen's third CFO inside of a year. Business Insider reported on the departure of MedMen's chief marketing officer, David Dancer, in September

Vivien Azer, an analyst at the investment bank Cowen, called the deal's failure a "surprise" after it cleared a Department of Justice antitrust review a month ago and MedMen put out an "optimistic" statement about the deal's prospects. 

MedMen isn't the only cannabis company facing troubling news this week, either. Hexo Corp pulled its 2020 forecast on Thursday, citing a challenging operating environment in Canada, causing its shares to freefall. And on Wednesday, Aleafia terminated a supply agreement with Aphria after it said the latter company didn't meet obligations, causing shares in both companies to tumble.

top 10 banks involved in cannabis deals table

Shayanne Gal/Business Insider

'The environment is really challenging'

Murray Huneke, a managing director at the San Francisco-based boutique investment bank North Point Advisors, told Business Insider that there are some "specific" factors to MedMen as the reason why it failed to close the PharmaCann deal — notably, constant executive turnover and lower share prices than its competitors. But it's still a tough time to be a cannabis company.

"The environment is really challenging from a capital markets perspective," says Huneke. "Market caps for cannabis companies have been cut in half since their highs."

Huneke says cannabis companies are going to think back to "frothier" times — like earlier this year — and hoard cash to weather the storm, especially as legalization in the US is progressing slower than expected. 

Read more: We got an exclusive look at the pitch deck buzzy California cannabis company Canndescent used to raise $27.5 million as it muscles into new markets

"It's better to be a survivor in the long run," says Huneke. 

Most banks won't lend to the cannabis industry since THC is federally illegal in the US. That's forced companies to use their stock as currency to fuel acquisitions. And when share prices fall, it makes those deals harder to close. 

For a seller like PharmaCann, getting MedMen's stock in return for control of the company might have seemed like a great bet last year. Now that MedMen's share price has plummeted, it no longer seems like such a good idea — and this pattern is replicated all over the cannabis industry, said Jesse Pytlak, a cannabis analyst at the investment bank Cormark Securities.

"There's a risk to all of these deals," Pytlak says. "It's more unique with MedMen as the stock price has performed quite poorly relative to others."

cannabis

Cannabis plants grow inside the Tilray factory hothouse in Cantanhede, Portugal April 24, 2019.

REUTERS/Rafael Marchante

People aren't paying to 'dot up a map' anymore 

In the last quarter of 2018 and through the first few months of this year, US cannabis companies like Harvest Health & Recreation and Curaleaf, among others — known in industry parlance as multistate operators (MSOs) – went on a follow-the-leader dealmaking tear, announcing near-billion-dollar acquisitions one after anotherin order to build-up scale and fill out the map with operating licenses in states where marijuana is legal. 

"Putting together deals because everyone else is doing it — I don't think it's the same environment at all," Huneke said.  

Read more: 'It's a once in a decade opportunity': How top VC firms like Greycroft and Lerer Hippeau are cautiously opening their doors to the potentially $194 billion cannabis industry

Six months to a year later, lots of these deals still haven't closed, gummed up by DOJ antitrust investigations, slumping share prices, and "incremental" rather than "revolutionary" marijuana legalization in the US, said Scott Hammon, a partner at the accounting and advisory firm MGO. That and the deals have gotten a lot larger and more complex. 

"Public companies have mostly disappointed investors' expectations," Hammon said. "Many parties agree there was a bit of a bubble mentality. Valuations didn't forecast true operating results, and the significant reductions in valuations make it much harder to close all-stock deals." 

To Huneke, the days when cannabis companies would pay to "dot up a map" are over. "The currency is worth much less, and cash is harder to find," Huneke says. "Efficiency and execution are hard. People are saying 'when are we going to see real cash flow and real scale? Who's winning specific markets." 

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