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Новости/Аналитика

Confusion over US hemp industry mergers and acquisitions

14.11.2019

The reality of the hemp industry at the moment is that it is no longer a "gold mine", it is a market with fierce competition. Based on the history of the development of other branches of world production and the laws of economic theory, we can conclude that in the near future the situation in the hemp production market will stabilize, and those interested in the development of the company will have to choose a clear course for their hemp business segment .

After the rapid growth of cannabis production in the USA , not without exaggerating the “burning appetite” for hemp products and the creation of a number of large industrial concerns, there has recently been a certain mess in mergers and acquisitions of small and medium-sized companies, total conquest of the market and infrastructure, although Until recently, a significant increase in the sales of shares of institutions that had invested heavily in this business was predicted. Expectations of a rapid growth in the securities market of medical and recreational hemp companies are significantly overestimated; therefore, mergers and acquisitions either fall apart or make significant changes to them.

It was expected that one of the many ways to implement mechanisms to expand the hemp industry , especially in the United States , is through the flow of mergers and acquisitions. Between October 2018 and April 2019, more than half a dozen major deals were announced in the United States , mainly among vertically integrated companies. It was assumed that these mergers and acquisitions would have a transformative character due to the strengthening of retail trade and regional production . However, in recent weeks, many of these transactions have been amended or completely disintegrated.

In particular, the management of MedMen Enterprises informed investors that they were postponing the acquisition of the private company PharmaCann. When the merger was first announced in October 2018, a proposal to acquire all of the shares was estimated at a whopping $ 682 million. The transaction is expected to double presence "MedMen" from 6 to 12 states, as well as add more than two dozen licenses to retail . Essentially, such a business plan was designed to make MedMen one of the largest retailers in the United States . However, the deal crashed just three days before announcing the anniversary of its start. “MedMen” eventually alluded to four reasons why it no longer considers the transaction reasonable:

1) legislative obstacles that currently affect the American hemp industry ;

2) the need to focus on the main markets , and not decrease, acquiring retail sales in non-core markets ;

3) the extension of the terms of consideration of the transaction to weigh all its pluses and minuses;

4) the company's desire to focus on the markets of California and Florida, which are now the most voluminous.

About three weeks after MedMen refused to purchase PharmaCann, Curaleaf Holdings announced on October 30 that it was working on amendments to the acquisition of Cura Partners, which is behind the popular Select brand of hemp products . . Initially, it was announced at the end of April that Curaleaf would transfer nearly 95.6 million ordinary shares to the purchase of Cura Partners. At that time, it was the most expensive deal ever announced in the United States . But after the amendments, Cura Partners will receive 55 million shares of Curaleaf, which costs only $ 293 million. The remaining 40.6 million shares of the original transaction will be paid to Cura Partners in case of unforeseen circumstances. Despite the fact that it looks like a big amendment for Curaleaf - essentially making the acquisition a better deal - it can also be easily interpreted as a recognition that the company initially agreed to overpay for Cura Partners and its partners. 

Two weeks after Curaleaf changed the terms of the deal with Cura Partners, November 13, Cresco Labs and Origin House (one of the few hemp distribution licenses in California - the largest market for this product in the world by annual sales ) became the new “duet” that changed the terms of the merger. The new deal was concluded in an amount that is significantly lower than the initial conditions, while the shares of both companies have fallen significantly since the beginning of April 2019. It was also decided to issue additional shares to attract new investments . All this is evidence that already completed acquisitions in the field of hemp business have been greatly overestimated.

A similar confusion in business between large companies also manifested itself against the background of job cuts and the dismissal of a huge number of workers involved in the hemp industry . Experts suggest that recent layoffs from hemp production facilities are only part of the reality test because further job cuts are expected.

The trend of layoffs has already passed from state to state. At the same time, there is an opinion that the current situation does not cause concern, but simply recalls that careful financial calculation is in first place in building a business. First of all, the business models that companies follow must be clearer in order to properly build and subsequently adjust the course. Also, business representatives complain about the impossibility of obtaining cheap loans. If traditional banking services were widely available to the hemp industry , companies could avoid layoffs by quickly receiving the necessary funds. Currently, traditional lenders are taking a wait and see approach after the US House of Representatives enacted the Safe Banking Act.

Overproduction of psychoactive cannabis products also leads to job cuts and curtailing companies, forcing them to seek new markets . Several Latin American countries legalized medical cannabis in 2017 and 2018, giving hope for the development of large-scale business opportunities , but verification in real conditions shows that the regulatory framework on the continent is in its infancy, and opportunities for generating significant income remain beyond the horizon .

For example, Colombian subsidiaries of the largest Canadian licensed growers were unable to register varieties in the above South American country, suggesting that regulatory requirements may delay market entry longer than originally anticipated. Despite $ 400 million investment in Colombia , cannabis for medical use is still not legally available to local patients, with the exception of Sativex, but its export is still negligible. In the summer, some of the leading domestic licensed Colombian producers reported an expectation that the sales in the domestic market will begin before the end of the third quarter, but so far they have not been realized.

Argentina legalized the use of hemp for medical purposes in early 2017, but after almost three years, the law was practically not implemented. There are still no functional rules in the country that provide enterprises with a clear idea of ​​how to act. This country is one of several examples in Latin America where operating markets with real consumers have not been implemented, although laws have been finalized.

Brazil is another case where reality has not met expectations, although it can still change. In recent months, industry stakeholders have hoped that important legislative reform will be proposed in the country, but these efforts have been accompanied by multiple delays.

Mexico - was the biggest focus of expectations, but recently the country has missed opportunities to legalize the use of hemp for medical purposes , demonstrating the general unpredictability of the legislative process. This allowed the enterprises producing legally psychoactive hemp to function for only a few months, however, today companies of the above economic sphere cannot benefit from any significant business opportunities.

Jamaica - represents the largest potential domestic market in the Caribbean, but businesses are at a standstill due to a dysfunctional banking system and delays in export regulation.

Commentary of the Ukrainian Technical Hemp Association

Most likely, the confusion in business relations between companies operating in the hemp industry , the fall in profits of such enterprises and large-scale layoffs are a signal that hemp production is a constantly developing modern industry with all the attributes and traps of the main business. As in any other industry, the absence of a balanced regulatory framework, the construction of a clear model for profit from a particular market segment or poor management decisions can lead to negative consequences during the consolidation of firms and staffing. The reality of the hemp industry at the moment is that it is no longer a "gold mine", it is a market with fierce competition . It leads to the fact that many qualified specialists are left without work against the background of the fact that until recently, medical hemp was often considered as a growing global industry , bringing only profit to all participants. However, basing on the history of the development of other branches of world production and the laws of economic theory, it can be concluded that in the near future the situation on the hemp production market will stabilize, and those interested in the development of the company will have to choose a clear course for their hemp business segment .

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