Please ensure Javascript is enabled for purposes of website accessibility

Will These U.S. Cannabis Megadeals Ever Be Completed?

By Sean Williams - Sep 25, 2019 at 7:21AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

A number of marijuana acquisitions are taking longer than expected to close.

Investors would probably struggle to find a faster-growing industry at the moment than legal marijuana. With a double-digit compound annual growth rate over the next decade, cannabis may offer patient investors incredible returns.

But the thing is, the marijuana space is incredibly crowded. This is especially true in the U.S. market, which is projected to be the largest in the world by annual sales. The need to gobble up as much market share as possible has led to a wave of consolidation and deal announcements in the U.S. market over the past year. However, this dealmaking hasn't necessarily produced much in the way of certainties, with either Canadian or U.S. regulators holding up these combinations for many months.

Today, we'll take a closer look at some of the biggest deals in the U.S. cannabis space over the past year and opine if they might ever close.

Two men in a suit shaking hands, as if in agreement.

Image source: Getty Images.

MedMen's $682 million deal to buy PharmaCann

Given the rapid ramp-up of the legal weed industry, it probably feels like eons ago that vertically integrated dispensary operator MedMen Enterprises (MMNFF 0.89%) announced that it'd be acquiring privately held dispensary operator PharmaCann for $682 million in an all-stock deal. But more than 11 months since making the announcement, it's still not guaranteed to get the all-clear from U.S. regulators (more specifically, the antitrust division of the U.S. Justice Department).

Should the deal get done, the combined company would have 92 retail licenses in a dozen U.S. states, with a strong presence in California, Florida, and Illinois, all of which should represent top 10 markets in terms of annual pot sales. The duo would also have 38 operational stores, placing the company second in the marketplace behind only Curaleaf Holdings (CURLF 0.70%)

Earlier this month, the Hart-Scott-Rodino Antitrust waiting period for MedMen's proposed acquisition of PharmaCann expired, which moves the deal one step closer to completion. MedMen continues to expect its purchase to close by the end of the current calendar year.

Unfortunately, the cost of the deal for MedMen shareholders will be added dilution and perhaps even faster cash burn. Since announcing the deal, MedMen's share price has tanked, and the company has lost $178.4 million from operations through the first nine months of fiscal 2019. Issuing a boatload of stock to acquire PharmaCann is not liable to help its share price one iota, which is why, deal or not, MedMen remains a pot stock to avoid.

A green highway sign that reads, Welcome to California, with a white cannabis leaf in the right-hand corner.

Image source: Getty Images.

Cresco Labs' acquisition of Origin House

Another deal that's been taking an awfully long time to complete is the announced acquisition of Origin House (ORHOF) by multistate dispensary operator Cresco Labs (CRLBF 0.00%).

Cresco first announced its all-share purchase of Origin House on April 1, but this was anything but an April Fool's joke. The 1.1 billion Canadian dollar deal, when announced, aims to combine Cresco's nearly five dozen retail licenses in roughly a dozen U.S. states with Origin House's cannabis distribution business. Origin House is one of only a select few companies to hold a weed distribution license in California. This means that approval of their combination would allow Cresco Labs to get its branded products into more than 500 dispensaries in the Golden State.

For the time being, the holdup has been the Justice Department's Antitrust division, which requested additional information on the duo's combination. Concerns regarding the possibility that the deal may not be completed have certainly weighed heavily on Cresco's share price of late. 

However, a little more than a week ago, Cresco and Origin House satisfied those information requests and are now awaiting word from the Justice Department. Assuming everything goes to plan, which remains the prevailing expectation, the deal will likely close between mid-October and mid-November.

A tipped over clear jar packed with cannabis buds that's lying atop a small pile of cash.

Image source: Getty Images.

Curaleaf's $949 million purchase of Select

It might be hard to believe, but it's been nearly five months now since Curaleaf announced that it would acquire Cura Partners, the owner of well-known wholesale cannabis brand Select, for about $949 million. Like the other deals here, Curaleaf's acquisition has yet to close.

The deal looks like a no-brainer for Curaleaf, which aims to become the first legal marijuana stock to hit $1 billion in annual sales. Bringing Select into the fold effectively doubles Curaleaf's sales on a pro forma basis, and it gives the company access to Select's high-margin and well-marketed line of derivative products. Focused on the West Coast (more specifically, California and Oregon), Select ties in perfectly with Curaleaf's ideal of being the Southwest United States' go-to multistate operator. 

But will the deal get done, is the question? As of now, I don't see any specifics that would keep regulators from signing off on it. Yes, the Grassroots acquisition, announced in July, will create one of the largest multistate operators in the country. However, it's not as if there aren't numerous operators in California and Nevada (as examples) at the moment.

As a word of caution, understand that this is an all-share deal, and there's therefore the risk that some level of dilution could adversely impact Curaleaf's existing shareholders.

A black silhouette outline of the United States, partially filled in with baggies of cannabis, rolled joints, and a scale.

Image source: Getty Images.

Canopy Growth's $3.4 billion contingent-rights deal for Acreage Holdings

Lastly, there's Canopy Growth's (CGC -12.50%) mid-April-announced deal to acquire Acreage Holdings (ACRGF) on a contingent-rights basis for $3.4 billion. The deal, which has already been approved by shareholders, features a $300 million upfront cash payout ($2.55 a share), with the remainder being paid out in Canopy's common stock.

The aforementioned contingency is what could keep this deal from ultimately closing. In order for this acquisition to close, the U.S. federal government would have to legalize marijuana at the federal level. While we've witnessed medical marijuana legalized in 33 U.S. states, there are zero guarantees that we'll see any sort of reforms passed at the federal level.

Despite two-thirds of all Americans now being in favor of legalization, the Senate has become the enemy of reform measures on Capitol Hill. Republicans, in general, have a more adverse view of marijuana than Democrats or Independents, and Senate Majority Leader Mitch McConnell (R-Ky.) has made it clear that no cannabis legislation is going to reach the floor for vote. As long as President Trump remains in the White House, and/or Republicans control the Senate, reform remains something of a longshot. This suggests there's little guarantee, for now, of this deal closing.

Sean Williams has no position in any of the stocks mentioned. The Motley Fool recommends Origin House. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Canopy Growth Stock Quote
Canopy Growth
CGC
$2.87 (-12.50%) $0.41
MedMen Enterprises Stock Quote
MedMen Enterprises
MMNFF
$0.06 (0.89%) $0.00
Origin House Stock Quote
Origin House
ORHOF
Curaleaf Holdings, Inc. Stock Quote
Curaleaf Holdings, Inc.
CURLF
$5.73 (0.70%) $0.04
Acreage Holdings, Inc. Stock Quote
Acreage Holdings, Inc.
ACRGF
Cresco Labs Inc. Stock Quote
Cresco Labs Inc.
CRLBF
$3.53 (0.00%) $0.00

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
379%
 
S&P 500 Returns
123%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/09/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.