A California-based multi-state operator (MSO) is backing out of one of its pending merger agreements due to the volatility the marijuana market has seen in the past few months.
The all-stock deal, originally valued at US$682 million, was first announced in October of last year; it was signed a few months later in an effort to expand MedMen’s reach across the country. The merger would have given the company operations in 12 states with a combined total of 79 cannabis facilities.
Now, in light of a particularly dreary summer for the cannabis sector, MedMen is looking to narrow its plans to its currently existing addressable markets.
“The cannabis sector has evolved tremendously since we first announced the PharmaCann transaction and based on the current macro-environment and future opportunities that exist for our business, we believe it is now in the best interest of our shareholders to deepen, rather than widen, our company’s reach,” MedMen CEO Adam Bierman said.
MedMed shares dropped off over the course of the trading day on Tuesday, falling 9.2 percent from an open of C$2.18 to C$1.98 by 2:45 p.m. EDT.
The MSO said more value will be created by continuing to develop its branding, expanding its current position in California’s cannabis market and focusing on its digital platform. All these actions, according to the firm, will be more valuable long term over completing the acquisition.
The company said that due to the downward shift in both the American and Canadian cannabis industries since March of this year, it has taken a harder look at how it’s going to allocate capital.
Greg Cappelli, executive director at PharmaCann, said in a statement that the company’s board of directors is confident it will continue to grow as a business without the merger deal with MedMen.
It’s worth noting that MedMen isn’t coming away empty handed. As a part of the dissolution of the deal, PharmaCann has agreed to transfer some of its cannabis licenses and assets in Illinois and Virginia to MedMen instead of paying a traditional termination fee.
Being left with assets in Illinois is a “win” for the firm, Bierman said. A growing number of US states have legalized recreational marijuana use, and Illinois is the most recent addition.
The midwestern state legalized adult use back in June, becoming the first state to do so through its legislature, and the laws are set to come into effect in January 2020. In August, the state awarded its first retail licenses. According to Marijuana Business Daily, the state’s cannabis sector could generate up to US$2.5 billion a year once the legislation is in place.
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Securities Disclosure: I, Danielle Edwards, hold no direct investment interest in any company mentioned in this article.