Canadian cannabis companies seem to be increasing their interest in the United States marijuana market, even as the reality of federal legalization south of the border appears to be further away than ever.
That may be because these companies have few viable options on which to spend their capital amid limited opportunities at home and elsewhere internationally, such as Europe. Whether they can eventually compete with experienced and, in some cases, increasingly profitable domestic U.S. multistate operators (MSO) is another question.
“There was some excitement about international investment opportunities for Canadian companies, but those haven’t really delivered,” Tyson Macdonald, former executive vice president of corporate development at New York-based MSO Acreage Holdings, told The News Station. “To the extent they have excess capital, the U.S. market is still the best opportunity, so what else are they going to do with it?”
Recently announced transactions in the U.S. marijuana market involving Canadian companies include Tilray acquiring approximately $166 million in debt held by California-based MedMen Enterprises, and Toronto-based Cronos Group purchasing an option to acquire about 10.5% of Chicago-headquartered PharmaCann for approximately $110.4 million. Canadian retail chain High Tide is also positioning itself for eventual American federal legalization, buying up e-commerce operations in the U.S. and holding discussions with retail operators about potential involvement.
“I think we have seen more recent transactions adjusting and improving the structure of cross-border deals, creating the chance for a better outcome for all parties.”Tyson Macdonald
The problem is that everything is contingent on what High Tide CEO Raj Grover has termed the “big event” — federal legalization in the U.S., something he said last month is still likely two years away. Canadian cannabis companies that trade on major U.S. exchanges, such as the Nasdaq or the NYSE, are prohibited from acquiring American marijuana assets under the current framework of the drug being legal only in individual states.
When President Joe Biden was elected in November, with a Democratic advantage in both the House of Representatives and the Senate, optimism was higher than ever that legalization at the federal level was on the horizon. The current uncertainty is reflected in falling stock values of U.S. cannabis companies generally. Biden himself has urged Democrats to focus more on decriminalization rather than full legalization.
With partisan politics apparently stronger than ever, and with bigger issues and crises to confront, full legalization does seem quite distant, certainly more so than even a few short months ago. Nevertheless, Canadian companies are readying themselves, because most observers view legalization in the U.S. as an eventual reality.
Canopy and Acreage Deal Showed Possible Path Forward
The interest from Canadian companies in the U.S. cannabis industry can be traced to the at-the-time stunning move by Ontario-based Canopy Growth to commit to buy Acreage once conditions allowed.
That was in April 2019, when optimism was high in the cannabis industry generally and multimillion-dollar merger and acquisition deals were commonplace. It was also, of course, pre-COVID.
The estimated $3.4 billion transaction was contingent on eventual U.S. federal legalization, which may have, at the time, seemed more likely to be achieved sooner rather than later.
Last year, current Canopy CEO David Klein said federal legalization in the U.S. was looking likely in 2022. The company has not commented on whether that estimate has been updated.
The original deal, having undergone major revision, now stands valued at about $900 million and the architects of the deal on both sides, Kevin Murphy of Acreage and Bruce Linton of Canopy, have since departed their roles, though Murphy remains on the Acreage board as chairman.
The groundbreaking transaction had the advantage of being one of the first of its type, but being first doesn’t always mean being best, Macdonald said. It did, however, set the standard for others to learn from, he said.
“I think we have seen more recent transactions adjusting and improving the structure of cross-border deals, creating the chance for a better outcome for all parties,” he added. “The PharmaCann investment by Cronos, for example, seems to be a pretty smart play.”
Will Banking Reform Suffice?
Even as full federal legalization may appear somewhat distant, there remains optimism that banking reform on its own could enable ambitious Canadian cannabis companies to structure transactions to have direct equity holdings in U.S. marijuana companies.
It remains to be seen whether the eventual passing of the SAFE Banking Act — effectively allowing U.S. cannabis companies to fully use regular banking services — would allow Canadian companies trading on major U.S. exchanges to dip their toes into the marijuana market south of the border. The legislation was first passed by the U.S. House of Representatives in 2019 and then again in April of this year. It now faces a potentially long haul in the U.S. Senate.
But the passage of the law and it allowing restrictions to be lifted remain a possibility, Jesse Pytlak, institutional equity analyst at Toronto-based Cormark Securities Inc. told the News Station.
“There seems to be a better understanding on how transactions can be compliantly structured for Canadian cannabis companies to secure U.S. optionality, and I think companies are optimistic that federal banking reform will be sufficient for them to be able to convert these structures into direct equity positions,” Pytlak said. “Time will tell whether this turns out to be the case or not.”
But it won’t be a case of one size fits all. Some Canadian companies may be better suited to and set up for the U.S. market than others.
“While some of these transactions may eventually offer the strategic benefits that these Canadian companies are hoping for, the benefits for some look a bit more questionable,” Pytlak added.
It makes sense that Canadian companies will use their current lower-cost capital to invest in the capital-constrained U.S. market, said Mike Regan, founder of Denver-based cannabis research group MJResearchCo.
But some of them will likely face a battle against competing domestic companies, he said.
“The challenge for the Canadian operators will be entering a new foreign market with strong incumbents,” Regan told The News Station. “Any U.S. legalization will give equal capital access to the existing U.S. operators, so the Canadians will be competing in a new foreign market against profitable incumbents with newfound access to capital.” Along with the SAFE Banking Act, the U.S. Senate is also currently considering the Cannabis Administration and Opportunity Act, which seeks to remove marijuana from the Controlled Substances Act and allow for legalization. Marijuana trade organizations and activist groups submitted 169 pages of feedback last week on the proposed law. Passing this law should give Canadian cannabis companies full access to the U.S. market.