Cannabis Investments and Acquisitions Go Big

Sander C. Zagzebski, Partner with Greenspoon Marder LLP, gives us Part 2 of his Cannabis Primer series called 'Why Size Matters'

For the prior issue of this publication, I authored a piece on investing in legal cannabis companies, which generated a good deal of discussion. In the time since that article went to print, the legal cannabis industry has seen multiple headline-grabbing transactions that have only further increased interest in the legal cannabis sector. In this issue, I’m again focusing attention on the rapidly evolving cannabis space as transactions continue to increase in size and scope.

Constellation Brands Takes the Gloves Off

On August 15, 2018, Constellation Brands—the Fortune 500 beer, wine, and spirits company and home to, among others, the Corona, Modelo, and Pacifico beer brands along with the Prisoner wine brand—announced that it had agreed to invest CAD $5B (approximately US $4B) in Canopy Growth Corporation. This transaction was the largest single investment, by at least an order of magnitude, in a legal cannabis company to date. To industry observers and financial reporters alike, the Constellation/Canopy transaction seemed to usher in a new era for the corporate cannabis industry.

[To read more of Sander C. Zagzebski’s thought leadership click here]

Constellation had previously purchased 9.9% of Canopy for approximately CAD $190M, and also owned approximately a third of Canopy’s prior CAD $600M (approximately US $450M) convertible note offering. So Constellation was already a significant stakeholder in Canopy even before this latest transaction, and its new investment increased its stake in Canopy to approximately 38%. Constellation also received warrants to purchase additional Canopy shares, which, if exercised, could increase its stake in Canopy to over 50%.

Within days of the announcement of the Constellation/Canopy transaction, the financial press was reporting that Diageo, one of Constellation’s larger competitors, was in serious discussions with multiple cannabis companies about a similar transaction. The Coca-Cola Company has also recently been reported to be looking at the cannabis sector in general and producers of cannabidiol (CBD) products in particular. The mainstream press and Main Street executive suites certainly appear to be paying more attention to the cannabis sector after the Constellation/Canopy transaction.

MedMen Makes a Record Breaking Acquisition

On the heels of the Constellation/Canopy transaction, it was announced on October 11, 2018, that MedMen Enterprises had agreed to purchase PharmaCann in an all-stock transaction valued at US $682M. The MedMen/PharmaCann acquisition is reportedly the largest to date of a U.S.-based legal cannabis company, and it shows that aggressive U.S. cannabis companies are willing to engage in the arduous work of large scale mergers and acquisitions (M&A) transactions in order to expand their operations.

Just as the Constellation/Canopy transaction appears to be ushering in a new era of strategic financing transactions between cannabis companies and mainstream beverage/consumer products companies, the MedMen/PharmaCann transaction suggested to commentators that the U.S. legal cannabis industry was poised to witness a new era of M&A transactions, particularly larger M&A transactions fueled by the high valuations of some of the publicly traded and soon-to-be publicly traded cannabis companies.

No Shame in Cannabis Anymore

The large sizes of these recent cannabis transactions made headlines, and the participation of major non-cannabis players in the Constellation/Canopy transaction suggested to many industry observers that cannabis is finally becoming a legitimate industry for investment professionals. After all, Constellation’s position as one of the world’s largest alcohol companies showed a strategic willingness on the part of a major Main Street company to embrace cannabis as an acceptable consumer product and a complement to its existing product offerings.

In addition, Constellation turned to Bank of America Merrill Lynch for bridge financing and Goldman Sachs for financial advice in connection with the Canopy investment, which appears to be the first time either of these major Wall Street institutions has been publicly connected to a significant cannabis transaction. Multiple commentators have observed the willingness of both institutions to participate publicly in a cannabis transaction (albeit one that is legal at all jurisdictional levels, since Canopy refuses to operate in any jurisdiction in which its cannabis activities are not legal) and believe that this gives further credibility to the cannabis industry as a whole.

Swimming With the Sharks

As the cannabis industry matures and leading players continue to enter the public markets, it is inevitable that some will compete with increasingly sharp elbows. Early this year, it was reported that Aurora Cannabis would acquire CanniMed Therapeutics in a friendly transaction after a long, hostile takeover battle that resulted in litigation between the two companies. Others, including Aurora, have reportedly considered taking a hostile approach in other potential acquisitions.

As the cannabis industry matures and leading players continue to enter the public markets, it is inevitable that some will compete with increasingly sharp elbows.

Hedge funds and short sellers have also reportedly been increasingly active in the cannabis sector, and notorious short seller Andrew Left of Citron Research is reportedly considering launching a fund of several hundred million dollars dedicated to the cannabis sector by the end of the year. While Left’s fund would officially take both long and short positions in cannabis stocks, it seems clear from his public comments that Left—called “The Bounty Hunter of Wall Street” by The New York Times—sees more opportunities to take short positions in cannabis equities.

Cannabis Starts to Grow Up

To conclude, one can only observe that the cannabis industry is getting bigger, more sophisticated, and more competitive. Companies continue to seek increasingly large amounts of investment capital from financial and strategic investors, and seek to scale using both friendly and hostile approaches to acquisition targets in ever larger transactions. Many investors clearly see long-term investment opportunities, while others sense a looming correction in the secondary market. The cannabis industry still has a lot of growing up to do, but is maturing very quickly.

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