Hart-Scott-Rodino Waiting Periods Sabotage Marijuana M&A
We’re fast approaching the holiday season.
It’s hard to believe Halloween is this week. Those decorations will quickly be discarded as we prepare for the consumer event that truly matters – the winter holiday shopping season.
‘Tis the season to splurge and bust our budgets.
And soon it will be the season of returns – that unwelcome time when we trudge all those unwanted gifts back for store credit.
That’s a fitting image to keep in mind for today’s article…
Merger Milestone Unlocked
Over the last couple of years, we’ve seen a number of major marijuana milestones.
Almost exactly one year ago, Canada became the first G7 country to begin selling adult-use cannabis nationwide.
In the U.S., more states joined the growing number of marijuana legalizers during midterm elections. And we even saw states greenlight pot sales without a voter ballot measure.
This year in the U.S., the Secure and Fair Enforcement (SAFE) Banking Act became the first piece of pro-marijuana legislation to receive a House committee and a floor vote. Most importantly, it passed both.
And last week, another hurdle was cleared… maybe.
Multistate operator (MSO) Cresco Labs (OTC: CRLBF) announced the end of its waiting period under the Hart-Scott-Rodino (HSR) Antitrust Improvements Act.
This act was put in place so that mergers and acquisitions could not be completed until the Federal Trade Commission and Department of Justice approved the transaction and determined it could not hurt U.S. commerce under the antitrust laws.
So billions of dollars in mergers and acquisitions of American MSOs have been in purgatory.
The fact that Cresco’s waiting period has expired doesn’t sound like much. But this satisfies one of the remaining conditions for Cresco’s $820 million acquisition of Origin House.
Now, this isn’t just a major milestone for Cresco Labs. It’s possibly a major step forward for the entire American cannabis industry.
But we’ll all just have to sit on our hands and wait to see if this deal actually progresses. Because there may be a rotten fig in these dreams of sugarplums…
Last year, I predicted pot stock merger and acquisition (M&A) activity was about to go into overdrive.
Sure enough, it did.
Cannabis shares were high while the buying frenzy gained steam. We saw record-setting deal after record-setting deal.
But a strange thing happened… None of the deals were approved.
Reporting pro forma revenue became the norm for the industry. (This is what companies would make if any of their acquisitions were approved.)
Pot stocks investors are sick and tired of the lack of momentum on HSR approvals.
And this has weighed on U.S. cannabis shares in 2019.
The Department of Justice has requested more information… then more information… then more information during its antitrust investigations. This year, the agency has made at least seven “second requests” for information regarding mergers.
Sometimes it feels like the DOJ is stalling. Can you remember another industry subjected to such M&A delays?
At this point, we’re starting to get mixed signals from fatigued companies.
Recently, Harvest Health & Recreation (OTC: HRVSF) announced its Verano and CannaPharmacy acquisitions were on track to close by the end of the year. And it said the Verano deal was on pace to be certified by the Justice Department by the end of October.
That sounds optimistic.
On the other hand, MedMen Enterprises (OTC: MMNFF) abandoned its $682 million takeover of PharmaCann, which was launched in December 2018.
Part of the reason MedMen walked away was that cannabis stocks have been crushed since then.
So, I’d wager, unless there is some headway on marijuana M&A very soon, we’re about to see a new milestone – one of buyer’s remorse and renegotiations.
The High Five
Below are this week’s High Five, where – each Monday – I cover the five pot stocks I believe will make major moves – up or down – in the week ahead.
1) MedMen Enterprises (OTC: MMNFF) will report fourth quarter earnings after the market closes today.
Expectations are for $42.05 million in revenue with a loss of $0.09. But we’re looking for the company’s first quarter revenue to jump 135% to $50.44 million. And then for fiscal year 2020 revenue to soar 137.8% to $309.56 million.
The MSO continued its Florida push, opening two new dispensaries last week. That brings its total national footprint to 32 retail outlets, including seven in Florida.
MedMen plans to have 12 Florida dispensaries open by the end of the year. It’s licensed for 35 locations in the state.
2) Hexo Corp. (NYSE: HEXO) has been a tangle of bad news recently. It already released devastating preliminary fourth quarter results. It was supposed to report fourth quarter results last week but postponed those until today.
It also announced that it was laying off 200 employees – including two executives – to cut costs. And it’s shutting down several facilities once operated by Newstrike Brands, which was acquired in May.
We’re waiting to hear if there’s any good news to report… or if there’s any bad news left.
3) Curaleaf Holdings (OTC: CRLF), the largest American MSO with a market cap of $2.5 billion, is set to report third quarter results on November 19.
The company has two massive M&A deals waiting to be finalized.
In May, it agreed to purchase Select Brands from Cura Partners for $948 million.
In July, it announced the $875 million acquisition of GR Companies, also known as Grassroots.
Last month, Curaleaf received a second request from the DOJ concerning its Grassroots deal.
4) Harvest Health & Recreation (OTC: HRVSF) is on the M&A clock too.
As I mentioned above, the MSO announced its Verano and CannaPharmacy acquisitions were on track to close by the end of the year.
The Verano deal was on pace to be certified by the Justice Department by the end of October. That’s this week! So we’re waiting with bated breath.
5) Trulieve Cannabis (OTC: TCNNF) is the king of Florida cannabis. But it’s starting to feel pressure from the other MSOs like Curaleaf and MedMen.
But the billion-dollar pot stock achieved its own milestone last week by being added to the OTCQX Cannabis Index.
Trulieve also extended its partnership with the cannabis real estate investment trust Innovative Industrial Properties (NYSE: IIPR). And it will be presenting this week at the Canadian Securities Exchange and OTC Markets Group Cannabis Investor Day online conference on Wednesday.
As always, we like to compare the performance of our High Five with the benchmark Horizons Marijuana Life Sciences Index ETF (OTC: HMLSF).
Today, we’re going to take a longer-term view…
Year to date, the marijuana ETF and the High Five are all in the red. The difference is merely the magnitude of losses.
Curaleaf and Trulieve have both vastly outperformed the rest of the sector so far. Their losses are less than 25% each.
Now we face the tough questions…
Will all that red start to turn into green?
Will all these high-priced deals that are pending start being approved?
Or will all those purchases – once seen as gifts to investors – start being returned?
Very soon, “Monster Mash” will be booted in exchange for “Jingle Bells,” “Here Comes Santa Claus” and a whole host of holiday favorites that’ll hypnotize us into good cheer… until they become grating tunes.
Cannabis M&A is having the same impact.
We were excited by the announcements at first. But at this point, are there any deals still worth their original price tags? Or are they toxic assets about to pull a Grinch on balance sheets?
We’ll find out soon enough.
If you have a pot stock in mind that you’d like me to discuss here, leave a comment below.
Here’s to high returns,
About Matthew Carr
Matthew’s expertise ranges from classic industries such as oil and mining to cutting-edge markets like small cap tech, cannabis, 3D printing and cloud computing. With almost two decades of financial experience under his belt, Matthew’s knack for finding market trends never fails to surprise us, which is why we keep a close eye on his free e-letter, Profit Trends.