One of the biggest deals in U.S. cannabis fell apart on Tuesday after MedMen announced it terminated its $682 million acquisition of Illinois-based PharmaCann, citing mounting pressures in the capital markets, regulatory hurdles, and the company's ongoing push in its existing markets.
"The cannabis sector has evolved tremendously since we first announced the PharmaCann transaction and based on the current macro-environment and future opportunities that exist for our business, we believe it is now in the best interest of our shareholders to deepen, rather than widen, our Company's reach," Adam Bierman, MedMen CEO and co-founder, said in a statement.
Per the terms of the termination, which the companies said was a mutual decision, MedMen will forgive $21 million worth of debt for PharmaCann in exchange for some key assets in Illinois and Virginia. MedMen also terminated CFO Michael Kramer on Monday, perpetuating a trend of high level turnover at the company.
The news came as a shock to much of the industry, as MedMen had less than a month ago announced it had gotten the go ahead to go through with its deal, after the expiration of a mandated waiting period governed by antitrust laws. At the time Bierman referred to the acquisition as "transformative," and one that would "mold us into an even bigger and bolder company for our consumers."
"We understand the need to pivot in a rapidly evolving industry, but this announcement comes as a surprise to us, particularly given the timing of the HSR expiry press release issued less than a month ago, which consisted of optimistic management commentary in regards to the deal's prospects," Cowen analysts wrote in a note on the back of the news.
Cannabis stocks have continued their downward momentum from summer into fall, dragged lower by the impact of vaping-related illnesses on sales, and weak earnings reports. Amid all of these negative headlines, Brian Lauvray, head of development and strategy at cannabis consulting firm MMLG, which did a project with MedMen in 2018, said it was "responsible" for the California-based company to back out.
"Coming out from California, going into all these other states, being a [multistate operator] is really complex and difficult business to do. MedMen, maybe they stretched themselves a little thin, maybe they didn't, but what they are doing now is a very responsible thing for their shareholders," Lauvray said.
Despite the shock value of the announcement, Lauvray said the terms of the deal were really very favorable to MedMen. In exchange for debt forgiveness, PharmaCann has agreed to hand a cultivation facility, a medical dispensary, and an additional license for a recreational facility in Illinois, which is poised to kick off adult use sales January 1.
"[It's] going to be a boon for MedMen come January 1, 2020, particularly with these Illinois facilities," Lauvray said. "That's really really going to help MedMen expand their footprint in Illinois and establish themselves as a major player within the Midwest marketplace."
MedMen's now defunct agreement to acquire PharmaCann wasn't the only mega-deal to shock the sector within the past 12 months. Others include Harvest Health & Recreation's agreement to acquire Verano Holdings for $850 million in March, Cresco Labs' agreement to acquire Origin House for $823 million in April, and Curaleaf's agreement to acquire Chicago-based Grassroots for $875 million in July. All three have run up against antitrust scrutiny that has postponed their progress, but industry experts don't seem to think they'll face the same fate as MedMen and PharmaCann.
"We largely do not expect the MedMen/PharmaCann breakup to be a harbinger of things to come for Cresco (CRLBF)/Origin House (ORHOF) or Harvest (HRVSF)/Verano," Seaport Global analyst Brett Hundley wrote in a note.