MLB Eases Cannabis Rules
“It was a part of a larger conversation that was reflective of the attitudes changing in many parts of the country.”
^ In an interview with ESPN, Tony Clark, head of the Major League Baseball Players’ Association, noted the state legalization movement as an impetus for Major League Baseball to change its rules on cannabis testing. Going forward, cannabis-related conduct will be treated the same as alcohol-related issues, and players generally will be referred to mandatory evaluation and voluntary treatment. Source: ESPN
Higher Licensing Fees for Maine Hemp Farmers
“The proposed per-acre price went up because of our concern that the new federal standards will drop the number of growers, and then we will not have the revenue needed to run the program.”
^ Gary Fish, a horticulturalist who oversees Maine’s hemp program, says the state decided to double the per-acre cost of applying for a hemp license from $50 to $100. A drop in licensed hemp farmers is expected due to new USDA THC calculation methods, which will include THC acid (THCA) in its formula. If that rule had been in effect in 2019, 27% of Maine hemp farmers would have had crops that tested above acceptable levels, according to the Portland Press-Herald. Source: Portland Press-Herald
Committee Chair Says ‘No’ to Banking Act
"I remain firmly opposed to efforts to legalize marijuana on the federal level, and I am opposed to legalization in the state of Idaho. I also do not support the SAFE (Secure and Fair Enforcement) Banking Act that passed in the House of Representatives.”
^ Senator Mike Crapo (R-ID), chairman of the Senate Banking Committee, announced his opposition to the SAFE Banking Act, which would allow banks and credit unions to serve the cannabis industry. The SAFE Banking Act passed in the House in a 321-103 vote. Source: American Banker
“The more stable the industry becomes, the more money it generates, the more likely it will gain the power to move mountains,” I wrote in my editor’s note, titled “Let’s Move Mountains,” for Cannabis Business Times’ very first print edition in 2015. I cited Hezekiah Allen, the California Growers Association’s executive director at the time, who said, “It is time to work together to advance a cannabis industry that honors our heritage, creates opportunity today, and sets us up for future successes.”
When I co-founded and launched the CBT website in 2014, Colorado had just rolled out its adult-use program, and Washington state was ramping up to its rollout, the first U.S. states to legalize and regulate adult-use cannabis. It seemed surreal, but I also worried that prohibitionists would somehow chip away at the progress, sending us back to square one. The rollouts were not flawless—but regulators and newly legal businesses had nothing on which to base anything—no regulatory precedents, no business guidance, no data, nothing. They were the pioneers and got this train rolling.
The 2013 Cole Memorandum—written by then U.S. Deputy Attorney General James M. Cole and stating that the federal government should not intervene in state-legal cannabis programs—continued to dominate news stories, as it gave cannabis businesses a semblance of safety/protection. Until then, the industry lived in fear. Would the federal government arrest those involved in what was still a federally illegal industry? We didn’t know. CBT quoted many people who only allowed us to publish their first names or aliases.
We later watched California navigate the adult-use legalization gauntlet; the subsequent regulatory and financial burdens sent shock waves across an industry that had largely regulated itself since 1996 and left businesses crippled left and right.
We’ve seen a lot of businesses in other states come and go, particularly Washington. But 56% of all small businesses fail in their first five years of operation, according to the Bureau of Labor Statistics, a sign that all business ventures come with risk.
What I love about this industry, however, is despite intense competition, people generally want others to succeed. I hope the belief in the old adage “a rising tide lifts all boats” continues, as the work is not done. As an example of those striving to raise all boats, see our Editorial Advisory Board. These amazing people give significant time and insights to better the industry through the pages of CBT. We are ever grateful for their support of and influence on this magazine. We also have been extremely fortunate to have contributions from some of the most respected experts in cannabis.
To celebrate five years in print, CBT is sharing its most popular and important articles from the past five years. Though the topics vary, the reflections, lessons and strategies remain relevant today.
We hope we’ve contributed to helping cannabis cultivation businesses succeed in this constantly changing, ever challenging, wonderful industry. I am grateful that this is my home, and as the past five years have proven, we are moving mountains. Here’s to moving many more in the years to come, and continuing to, as Allen said: honor our heritage, create opportunity today, and set us up for future successes.
Perhaps the biggest M&A news in the fall of 2019 was the abrupt termination of MedMen and PharmaCann’s $682 million all-stock acquisition proposal. The news landed with a thud after a steady stream of blockbuster M&A announcements throughout the industry. But a lot can happen in a short amount of time in this business, and industry observers were left wondering what went awry between the two companies.
We haven’t heard much in the way of an answer.
“In sum, the circumstances that led us to make the deal with MedMen a year ago are no longer present today,” Jeremy Unruh, a spokesman for PharmaCann, told Cannabis Business Times.
Here’s one circumstance that had shifted notably: From the time the two companies’ definitive agreement was reached in December 2018 until its public dissolution in early October, MedMen’s stock price slipped from $2.65 to $1.49. That’s a 43% drop in the value of what MedMen would be putting up to buy PharmaCann’s assets.
As with so much in the cannabis business, time is a crucial factor in these corporate transactions.
Another reason why we’ve seen a slowdown in deals and an uptick in agreements falling through is the Hart-Scott-Rodino (HSR) Antitrust Improvements Act, a 1976 law that’s making itself at home in the fragmented U.S. cannabis industry. The HSR Act requires companies involved in mergers and acquisitions to notify the Federal Trade Commission and the U.S. Department of Justice Antitrust Division of their intent. In short, the law gives the federal government a window of time to review deals and decide whether a transaction will impact competition in a given market. It’s a consumer protection policy. During that 30-day window, the parties can’t close.
An HSR review is triggered by a complicated formula that includes the size of the deal and the size of the parties. Larger deals, suffice it to say, trigger these reviews. And the cannabis industry has seen bigger companies cutting bigger deals.
Cannabis remains federally illegal, so why would federal antitrust regulators stick their noses into this business? Sander Zagzebski, corporate and business practice partner at Greenspoon Marder, says that antitrust regulators in the DOJ couldn’t ignore the growth and consolidation of the cannabis industry.
“Nobody thought … that the federal regulators would look at cannabis deals,” Zagzebski says. “And then, lo and behold, they looked at all of them. Everybody got these [filings] at the same time, and it put a halt to everything.”
After a busy season of deals from August 2018 to the spring of 2019, the major headline deals started to slow down. Antitrust regulators started flagging certain deals for HSR reviews.
Antitrust Act Fallout
In June, Cresco Labs came out as the first major cannabis company to openly discuss the review.
“Consistent with other pending transactions in the cannabis industry, we have received a request for additional information from the Department of Justice regarding our acquisition of Origin House,” Cresco Labs CEO Charlie Bachtell said in a public statement.
This hurdle posed a question of time and federal oversight.
“It took the market a little bit of time to figure out how they wanted to approach it—how they should be disclosing it to investors, that sort of thing,” Zagzebski says.
An HSR review might worry investors, as it will naturally extend the amount of time between announcing a deal and closing a deal.
“You don't have to reveal any secrets to accept the fact that when all these deals were being announced, the stocks were trading at very high valuations,” Zagzebski says. “Now that the shares have come back down, one of two things are happening: Somebody in a transaction will generally have to take the market risk of what happened to the stock between signing the deal and closing the deal.
“If the market risk is on the seller, then all of a sudden they're getting paid a whole lot less than they thought they were getting paid for their company,” he says. “And if the market risk is on the buyer, then they're suddenly suffering a lot more dilution than they bargained for when they signed up to the deal. In either one of those situations, the dramatic change in the trading price will put pressure on the transaction.”
Hope on the Horizon
In the case of PharmaCann and MedMen, the companies have not gone into detail publicly about why the deal fell apart. But the stock dynamics and the emergence of antitrust regulations in the U.S. are having an impact on deals writ large.
And following the review period for Cresco’s major deal, the company announced that it had lowered the cost of its acquisition by 16% per share. As of Nov. 13, the deal had not yet closed.
Just as market consolidation on face value is seen as a natural process of a maturing industry, so too does this antitrust review signal a turn toward normalized relations with government. Cannabis is coming into its own, growing pains and all.
“From a long-term perspective of cannabis, it's actually really encouraging to see the regulators looking at it from the perspective of, ‘Hey, this might be legal some day, and we want to make sure other legal issues that affect the industry are being addressed,’” Zagzebski says. “So, the antitrust regulators actually stayed in their lane, as far as we can tell, and reviewed it from an antitrust perspective, which is actually a really positive thing. It means that some people in Washington are starting to treat cannabis companies like adults.”
Eric Sandy is the digital editor for Cannabis Business Times and Cannabis Dispensary.
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