Cannabis. Photo: 420MediaCo/Shutterstock.com

Many mergers and acquisitions in the cannabis space this year have either been changed significantly or abandoned entirely. Experts in the field say M&A in the cannabis industry has been difficult largely because of the volatile ever-changing cannabis market, federal prohibition and a patchwork of state laws.

In October 2018, MedMen Enterprises planned an all-stock acquisition of PharmaCann valued at approximately $682 million. A year after plans for the acquisition was announced, MedMen pulled out of the deal entirely. MedMen reportedly cited the changing market and how long it took for regulators to approve the deal. In May, Curaleaf reworked its all-stock deal with Cura Partners. Cura Partners was supposed to be given 95.6 million shares of Curaleaf stock, worth approximately $950 million at the time, in the deal. However, the deal was amended so Cura Partners could be bought for 55 million shares of stock valued at approximately $293 million.

Jeff Schultz, the general counsel and chief compliance officer of Navy Capital LLC, an investment firm that exclusively deals in the cannabis industry, said the common thread between all of the M&A deals in the industry is the volatile marketplace, a limited investor pool and the length of time the Department of Justice takes to approve those deals.

"That long window, coupled with rapid tectonic shifts in the industry, has led to a lot of re-cutting," Schultz explained.

Schultz said the lack of capital in the market for acquisition leads to stock option deals that are subject to change over time.

"The larger issue is a lack of traditional investment capital and a limited investor pool," Schultz said. "At best, there is very minimal participation from debt capital markets. What that leads to is highly dilutive financing opportunities."

Many of the deals are done for stock options rather than cash. This is because there is a lack of traditional investment in the industry and those stock prices are subject to change.

"Most deals in Canada and many deals in the U.S. are stock for stock deals because many companies today are short on cash," Schultz said. "Even if they do have cash, until the recent dramatic drawdown in stock prices, they've preferred to use their high-multiple stock as acquisition currency."

Because the industry is ever-changing, it also becomes difficult to draw up numbers that will hold up in the time it takes for a deal to come together.

"When you're putting the numbers together you're trying to hit a moving target," John Moynan, general counsel of Toronto-based -based cannabis company SLANG Worldwide, said. "When you're contemplating these transactions the numbers may be dramatically different on the date of the signing."

Moynan said, in his eyes, federal prohibition is what makes M&A in the cannabis space difficult.

"What you have is these wholly distinct entities, agreements and ownership structures. If you look at that in an M&A context, it's not as simple as up to the parent entity," Moynan said. "That is further complicated by each state having its own regulatory framework."

Outside of waiting for the Department of Justice to approve a deal, companies must also contend with state regulators and transferring licenses, which can take several months. There is not a predictable amount of time to expect when a cannabis license will be transferred.

Moynan said lifting the federal prohibition on cannabis would make things easier for M&A, but there would still be some short-term difficulties.

"The tricky part is that you have multimillion-dollar businesses formed under the current structure," Moynan said. "These businesses are largely structured to fit the old regime. There will be a hangover effect that we see from everyone sprinting to capture market share."