There's been some significant buyer's remorse of late in the cannabis industry, with would-be acquirers backing out of deals or amending them. It's not uncommon for such deals to change between the time they're proposed and the day they close, but the frequency at which that's happening in the cannabis industry is raising eyebrows among investors.
Below, I'll take a look at some of the more notable deals that have been renegotiated and what that may mean for the industry's future.
The Canopy-Acreage deal is worth a fraction of what it once was
On June 25, Canopy Growth (NYSE:CGC) and Acreage Holdings (OTC:ACRG.F) agreed to change the terms of their deal. The two companies initially agreed to a deal back on April 18, 2019, under which the Canadian-based pot producer would acquire Acreage and officially enter the U.S. pot market -- but only once marijuana is made legal here at the federal level. Although hemp is already federally legal in the U.S., marijuana is not.
As such, Canopy Growth's planned acquisition of Acreage Holdings always came with question marks since investors could have no idea about its timing.
But that hasn't stopped the two companies from modifying their pending transaction. The deal was initially valued at $3.4 billion and is now worth about $843 million. As it was mainly a stock-based purchase, a key reason that the value is so much lower today is that share prices have plummeted for pot stocks over the past year. In the last 12 months, Acreage's stock price has fallen 84% while Canopy Growth is down 60%. The Marijuana Life Sciences ETF (OTC:HMLS.F), which holds an assortment of pot stocks, has lost 64% of its value during that time.
Another problem for the cannabis industry is a lack of cash flow. The original deal between the companies included a $300 million cash component. But now, Canopy Growth -- which has more than 1.3 billion Canadian dollars on its books -- will pay Acreage shareholders $37.5 million in cash up front. Canopy Growth will also loan as much as $100 million to the New York-based cannabis producer to help fund its hemp business.
Many other deals have also changed
On June 12, High Times announced that it would be only be buying 10 California-based dispensaries from Harvest Health & Recreation (OTC:HRVS.F) rather than the originally planned 13. Here again, cash was a key consideration. The cash component of the deal will shrink to just $1.5 million paid to multistate operator Harvest, in contrast to the $5 million which was originally agreed upon back when the sale was announced in April.
In March, Harvest Health completely walked away from an $850 million deal to acquire multistate operator Verano Holdings. Harvest CEO Steve White said at the time that "given the persistent challenges in consummating this deal and current market conditions, both companies felt it was prudent to move forward separately at this time."
On June 22, Curaleaf Holdings (OTC:CURL.F) announced that it was changing the terms of its deal to buy multistate cannabis company Grassroots. The initial price tag of $875 million is being cut to $700 million and there will be no cash component. Under the original deal, Curaleaf would have had to pay $75 million in cash in addition to stock for the Chicago-based cannabis company.
Yet another cannabis company that recently altered an acquisition deal is Planet 13 Holdings (OTC:PLNH.F). The Las Vegas-based marijuana producer and retailer will still be entering the California market after successfully renegotiating its deal to acquire Newtonian Principles, which has a sales license for a dispensary in Santa Ana. The companies announced the updated deal on April 17, including $1 million in cash and $4 million worth of shares. A year ago, Planet 13 announced it would pay $10 million for Newtonian, with about $6 million of that coming in cash.
Should investors be concerned?
It's not surprising that these deals are coming down in value, as they're mainly stock-based, and cannabis sector stock prices have fallen in the past year. What's more notable is that the cash components in these acquisitions are decreasing or disappearing altogether, which suggests that liquidity is more of an issue for the industry than it was in the past.
Not only are companies struggling to turn profits but they're also running low on cash. Renegotiating acquisition deals or abandoning them entirely can help buyers conserve cash. It can also help them avoid issuing quite so much new stock, which dilutes investors and puts downward pressure on share prices.
These trends suggest that deals may be more limited in the future, especially for cash-strapped cannabis companies. And that means if a company isn't able to turn a profit or keep its head above water on its own, shareholders shouldn't count on a possible acquisition to help turn their investment around, since a bid may never come. If a pot stock isn't a good investment based on where the company is today, then investors should avoid it, regardless of the potential acquisition targets that exist in the industry.