Negotiation Station: Canopy Growth and Acreage Holdings have modified their would-be mega-merger in a move that dramatically decreases the headline price (down to ~$800 million from $3.4 billion) and increases Canopy’s flexibility. The new deal is, like the previous, quite complicated, including another upfront payment to Acreage shareholders, offering a $100 million loan to Acreage’s hemp subsidiary, and extending the term of the deal. Most notably, however, the exchange of shares has been split to allow Acreage shareholders to “participate in upside potential”. Meanwhile, CEO Kevin Murphy has departed the company.
Why It Matters: This was a messy, complicated deal that only became tougher as the cannabis industry has compressed from its heights. The deal faced two interesting pieces: Canopy really had no way out of the deal (it was more of future than an option) and the price was fixed. The incentives on the old deal were thus not great - any growth or success at Acreage before acquisition really just accrued to Canopy, and the results since have shown. The new deal makes the best of a bad situation by giving Acreage cash it needs, reducing the price Canopy’s paying, and incentivizing future performance while cutting the CEO who hasn’t really executed. Deals aren’t dead, but they’re definitely in need of some lipstick.
Never Eaze-y: Federal prosecutors have charged a German businessman with conspiracy to commit bank fraud after he allegedly helped Eaze trick banks into processing over $100 million in cannabis sales. Prosecutors claim that the businessmen disguised transactions with phony online merchants, fake offshore corporations, and miscoded products. The allegations echo the DionyMed suit from last year, which said Eaze had an unfair advantage through a payment system that skirted federal rules.
Why It Matters: Well, things haven’t been great for Eaze, and this certainly doesn’t help matters. The company is reportedly cooperating in hopes of leniency, but… it’s just another bad look for the beleaguered company and another highlight of how payments are the mega-pain point across the industry. It’s hard to overstate the tremendous accelerative benefit we’ll see across the industry if/when federal regulations loosen. Until then, stopgap solutions might be as likely to cause new problems as they are to fix the existing ones.
Inherent Bias: A current Justice Department official is alleging that Attorney General William Barr’s personal bias against the cannabis industry inspired him to direct improper antitrust investigations into mergers. Cannabis transaction represented nearly ⅓ of cases in 2019, despite many staff members’ beliefs that they didn’t meet the criteria as “companies with low market shares in a fragmented industry”. The Justice Department has defended the investigations, claiming the industry’s nascency and rapid growth made the investigations appropriate.
Why It Matters: I mean, we all sorta knew this one, right? To any observer accustomed to traditional M&A, the length and depth of antitrust investigations were a little confusing. Few proposed mergers seemed to approach the typical criteria, given the low market shares held by major companies. The investigations were far from harmless, as the delays in mergers forced companies to operate through an extended ‘will they/won’t they’ purgatory while the broader market imploded.
Winning In The Pleasant Peninsula: Joe Ori is the co-founder, general counsel and government relations lead at Six Labs, a new vertically integrated cultivator in Michigan focused on the cultivation of next-generation premium cannabis products. We talked with Joe on his path to starting Six Labs, building a cannabis business in Michigan, the issues he sees in the market, and more with Joe. Check it out here!