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May 16, 2019
M&A and Cannabis-Related Matters
As one of the members of the Aird & Berlis Cannabis Group who deals with a lot of mergers and acquisitions (M&A), I thought that I may have something useful to add to the conversation about mergers and acquisitions within the cannabis industry. There is much speculation about capital formation and ‘going public’ transactions (in various forms) in the relevant space.
What we have noticed is that cannabis business buyers are looking to establish a greater presence by merging with or acquiring another similar business. Buyers are also attempting to get a toehold in other potential markets. We have seen liquor, food and tobacco or nicotine companies invest significant amounts in well-established Canadian enterprises. We have also seen Canadian companies create a significant toehold in our market so that when the production and sale of the product becomes legal, the Canadian enterprise will be well positioned to take advantage of the head start. The sellers are looking to receive some cash and future growth in the form of shares. There is speculation that additional food and beverage companies may wish to enter the cannabis space to position themselves for the future. We have also read about well-established cannabis companies doing sponsorship transactions with celebrities to be able to establish a brand or presence – notwithstanding the limitations imposed in Canada on branding. We are aware of various cannabis companies who are investing in research organizations with a view to enhancing consistency and volumes of product.
The recreational use of cannabis became legal in Canada in October 2018 (medical use being legal for a longer period of time in Canada). There are a number of states in the United States where the recreational use of cannabis is permitted and legal, such as Washington, Oregon, California, Colorado, Nevada and Massachusetts, amongst others. The likelihood of the United States changing its federal laws to permit the legal recreational use of cannabis and to open the U.S. banking system seems to be more politically driven than otherwise and may take some time.
Canada has a number of models for assisting cannabis companies. For example, Canada has been using the junior mining model whereby the capital formation is done in Canada and the shares of the business are traded on the TSX Venture or the Canadian Securities Exchange, but there are no real assets in Canada. Canada is used to this role. The foreign business usually does not carry on business in the United States and does not sell in U.S. dollars (due to U.S. dollar transfers usually needing a U.S. bank, most of which are federally regulated, and because cannabis is illegal federally in the United States).
The recent Canopy/Acreage transaction, which received much media attention, had the shareholders of Acreage receive more than US$300 million and grant Canopy a seven-year option on the right of Canopy to become the controlling shareholder of Acreage immediately upon the U.S. federal laws permitting the recreational use of cannabis legally. Both Canopy and Acreage agreed to work together in the interim. Clearly this was structured to avoid being in contravention of current U.S. laws and to position the Acreage shareholders to receive some cash now and more later, and to allow Canopy to establish a large presence in the United States in the future, with the ability for Canopy to state that it had the U.S. presence right away.
While cannabis companies are like many other startup businesses in that the need is for capital, employment agreements, real estate (whether store front or growing capacity), intellectual property, etc., the valuations may have some effect in the future. Right now the valuations seem fabulous, but the future may bring a different valuation. Also, the role of indigenous peoples may be evolving in Canada and likely in the United States as well. There may be some politics involved in this.
There are many Canadian law firms which have a significant number of lawyers and other legal professionals involved in cannabis, and the United States seems to have some terrific smaller firms which are active in statewide regulatory matters. However, there is a more limited number of nationwide players with international capital markets, M&A and tax expertise.
Aird & Berlis has a large multi-disciplinary team with diverse knowledge and expertise in regulatory, capital markets, M&A and other areas needed for various cannabis activities. Our firm is certainly well positioned to assist with domestic and international matters.