Both in the U.S. and in Canada, the cannabis industry has seen billions of dollars worth of acquisitions as the industry undergoes a consolidation phase.
While this is a good thing for companies, investors, and the industry as a whole, this has also attracted the scrutiny of federal trust busters examining whether certain acquisitions could squash competition in the still-young industry.
Currently, the U.S. Department of Justice is reviewing a number of deals with more scrutiny than before, which is weighing on the sector and triggering worries about whether some of these deals could fall apart.
Currently, deals involving Chicago-based Cresco Labs (CSE: CL) and Arizona cannabis giant Harvest Health & Recreation (CSE: HARV) are seeing an increased level of scrutiny from federal regulators.
In the past, major cannabis deals went through without much issue, due to the relative youth of the industry as well as the fact that there were still enough major companies in the market that monopolies wouldn’t emerge yet.
“At first glance, it seems ironic that a federal agency is reviewing transactions in a federally illegal industry, but based on sizable public company involvement and the value of these transactions, it would appear that, by default, these deals would qualify for review,” said Jesse Pytlak, equity analyst at Toronto-based Cormark Securities. “The uncertainty is very injurious to the target business. It is eight or nine months of uncertainty,” added Larry Silverman, partner at Miami-based law firm Akerman, according to recent interviews from Marijuana Business Daily. “The mere issuance of these (second requests) kills a heavy percentage of these deals.”
Even if these deals end up going through, they will now be undergoing further requests for information from the Department of Justice, which could lead to several months of additional setbacks for these deals. At the same, this increased scrutiny could deter future deals come coming through, possibly even signaling the end of what’s been a pretty impressive M&A season for the cannabis sector.
While thousands of merger deals are proposed every year, only around 5 percent of them eve receive a second review. The issue is that these reviews take months and millions of dollars from the part of companies to resolve, and that extended uncertainty can negatively impact a company’s situation with its employees, customers, and suppliers.
In some cases, the two parties in a merger agreement could abandon the deal altogether due to the increased risks and setbacks that come from receiving a second review.
What is clear, however, is that cannabis stocks have fallen so far in the year after reaching an earlier year. While there are other factors in play, the idea that federal authorities are now inserting themselves into the cannabis market with increased scrutiny is having an adverse impact on stocks.
When coupled with other regulatory hurdles dampening the markets, such as how the FDA has been handling CBD regulations for edibles by classifying it as a drug, markets are less than excited to deal with these delays. Major U.S. multi-state-operators, who have been growing mainly through strategic acquisitions, will also be hard hit by this change in regulatory philosophy.
Considering the fact that it’s easier for a company to enter another state’s market through acquisitions rather than try to acquire a license, increased scrutiny on future mergers could reduce the growth prospects of America’s top cannabis companies.
