Stock prices are currently trending downward. As stock prices plunge, optimistic valuations of many cannabis companies are depreciating. According to CNN, “regulatory landscapes remain in flux, and now deals are coming off the table.”
MedMen Enterprises is one of the most recognizable names in cannabis right now. They aimed to be the nation’s paragon cannabis company but the likelihood of that dwindled Friday when they made a mutual decision to dissolve their plans to acquire PharmaCann. PharmaCann was previously valued at $682M.
This is not isolated. It would be reasonable to assume that this deal dissolution is the first of many. Larger cannabis companies have plotted similar movements but the market isn’t ideal for these types of movements right now.
“The pressure is on for CEOs of public cannabis firms. Analysts and investors alike are keying on the health of balance sheets, cash on hand and paths to profitability, said Andrew Berman, CEO of Harborside, an Oakland-based cannabis dispensary operator that listed on a Canadian exchange this summer. To ensure the financials stay in order sometimes requires a decision to cut bait on planned expansion moves that once looked attractive, he said.”
Previously, many companies in the cannabis industry were being defined by grandiose valuations based on promising 3 year projections. These projections no longer seem as realistic. Now, cannabis companies will have to work towards valuations that are rooted in reality and associated risk. Investors are taking note.
Companies have to evaluate potential mergers and acquisitions that are on the table and reevaluate them with a pragmatic lens. Some decisions and opportunities that seemed positive may now be out of reach and potentially detrimental to sustainable growth.
According to Alicia Wallace for CNN Business, “the precipitous drop of MedMen’s stock — shares are $1.42 now versus $4.46 last year when the deal was announced — sunk the value of the all-stock PharmaCann acquisition. The broader market conditions made the decision easier.”
Larger deals are vulnerable to shifting or falling apart. Smaller companies are not exempt. As deals like this continue to fall through, the trend will become evident and the c-suite and decision makers
Wallace predicts that “The precipitous drop of MedMen’s stock — shares are $1.42 now versus $4.46 last year when the deal was announced — sunk the value of the all-stock PharmaCann acquisition [and] the broader market conditions made the decision easier.”
Ultimately both companies decided that it would be mutually beneficial to dissolve the deal.
Not all was lost on the deal.
“California-based MedMen received four parting gifts in exchange for forgiving a $21 million line of credit to PharmaCann: a license for a facility in Virginia; a license for a store in the Greater Chicago area; a cultivation and production facility in Illinois; and an operating store in a Chicago suburb… The announcement of the scuttled deal also included word that MedMen fired its chief financial officer — continuing C-suite turmoil that has included executive departures and a lawsuit filed by a former CFO.”
As companies continue to grow and find their place in the market, so will regulations. Regulations and state-to-state differentiations will likely cause more deals like this to reconsider and evaluate their growth strategies and how they capitalize on this market.
What is a major factor affecting the industries you correspond with? What are your predictions for how these factors will impact trends in 2020? Let us know!