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Deal to create one of the largest cannabis companies in the U.S. called off The all-stock merger of PharmaCann and MedMen was the first of several major transactions in an industry consolidation wave.

Crain's Chicago Business

Tuesday, October 8, 2019  |  Article  |  John Pletz

Marijuana, Medical, Recreational

PharmaCann and MedMen have called off their planned merger, which would have created one of the largest cannabis companies in the U.S.

Chicago-based PharmaCann is a major player in the industry, one of a handful of companies with operations in multiple states. On Christmas Eve, it announced plans to be acquired by Los Angeles-based MedMen in an all-stock deal.

It was the first in a flurry of deals as the nascent industry began to consolidate. Chicago-based Verano Holdings and Grassroots soon announced plans to be acquired.

The M&A activity cut into Chicago's out-sized presence in the legal-marijuana space. A year ago, it was home to five stand-alone companies that were among the 10 biggest industry players, with licenses in multiple states. Green Thumb Industries and Cresco Labs each went public in Canada, but the others decided to sell. With the MedMen deal unraveled, PharmaCann could now go either way, an analyst says.

“Today we turn the page and begin a new future for our company and our stakeholders. The PharmaCann leadership team has done an exceptional job balancing many demands this past year, and the board is extremely confident in the team’s ability to continue to grow the business,” Greg Cappelli, the company's executive director, said in a prepared statement.

It will do it with new leadership. Teddy Scott, a former partner at Polsinelli law firm who co-founded PharmaCann, stepped down as CEO in August but remains on the board. The new CEO is Brett Novey, the company's longtime director of finance.

The PharmaCann deal was valued at $682 million when it was announced, but MedMen’s stock has fallen 44 percent since then, caught in a downdraft with other weed stocks. The deal also faced regulatory hurdles.

“MedMen and its board have determined that focusing on leveraging the company's retail brand, its leadership position in California, and its digital platform to grow the business will create greater shareholder value than the completion of the transaction," MedMen said in a statement.

As part of a termination fee, PharmaCann will give MedMen a retail license in Evanston and a cultivation facility in Hillcrest.

PharmaCann has licenses for up to 26 retail locations and five cultivation and processing facilities across six states, including Illinois, Massachusetts, New York, Pennsylvania and Ohio.

PharmaCann will have to regroup, but it won’t be easy. Cannabis companies are scrambling to be ready to meet the Jan. 1 deadline for recreational sales in Illinois, which will make PharmaCann more attractive. The funding environment is more challenging than before.“They’re likely to either look to raise capital or look to someone else to come in and make an offer,” said Jesse Pytlak, an analyst with Cormark Securities in Toronto who follows MedMen. “It would be really difficult to go public right now.

“I wouldn’t be surprised to see another large cannabis company take a look at PharmaCann’s assets. But a lot of the potential buyers have their plates full with other acquisitions. It’s a tough period in the cannabis space.”

Pytlak said MedMen had its own challenges, when it came to capital, particularly a higher burn rate than other cannabis companies. So he doesn’t see the unraveling of the PharmaCann deal as a signal that the acquisitions of Chicago-based cannabis companies Verano Holdings and Grassroots Cannabis.