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Tuesday October 22nd, 2019 8:00PM

MedMen's ends blockbuster deal adding to cannabis stock woes

By The Associated Press
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LOS ANGELES (AP) — Marijuana stocks have come down hard from their highs a year ago, and the skid isn't just spooking investors.

On Tuesday, MedMen Enterprises Inc., which sells legal cannabis in California and 11 other states, backed out of a blockbuster deal to buy PharmaCann, a Chicago-based marijuana company with operations in eight states.

In its announcement, Los Angeles-based MedMen cited the steep pullback in U.S. and Canadian cannabis stocks this year. It noted the Horizons Marijuana Life Sciences Index, a Canadian exchange-traded fund that tracks cannabis stocks, is down 47% since March.

"The underperformance has made it increasingly more critical to allocate capital efficiently, given the current industry headwinds," MedMen said in a news release.

The deal was announced in December and was seen as a forerunner of a wave of marijuana industry mergers and acquisitions promising big returns for investors.

Billions poured into marijuana stocks last year as investors got on board with the big, multistate operators with the funds to acquire costly licenses in the 11 states where it is legal to sell cannabis products.

A flurry of deals in late 2018 and early this year continued to entice investors. But hopes of mergers getting quick regulatory approval soon faded as the U.S. Justice Department began to review the deals for potential antitrust violations. That review process has yet to be completed, though some analysts expect the deals could begin closing as early as this month.

"There's been a delay in M&A activity and that's prompted investors to step away from the sector until they know M&A activity is going to pick up again," said Bobby Burleson, an analyst with Canaccord Genuity. "That's kind of dampened enthusiasm for the sector, because that was one exit path that looked like it was closed temporarily."

Investors have had no shortage of reasons lately to sour on marijuana stocks, beyond the delay in deal approvals.

Vaping-related deaths and illnesses have contributed to the slide in some cannabis stocks. States including Massachusetts and Montana have also temporarily banned sales of flavored electronic cigarettes and vaping products in a bid to reduce underage use.

Vaping of marijuana products in states where it is legal for adults account for over a quarter of revenue for the sector and, in some cases, 30% or more of sales, Burleson said.

"People are waiting to see whether or not there's been a negative impact over all on industry revenue," he said.

Also weighing on marijuana stocks is a increase in stock market volatility brought about by a slowing U.S. economy and uncertainty over the trade war between the U.S. and China.

Still, cannabis stocks are a big loser so far this year, relative to the broader market.

Consider, the ETFMG Alternative Harvest exchange traded fund, which focuses on cannabis stocks: It is down 19.6% this year and off nearly 50% from a year ago. And shares in some of the biggest marijuana companies, including Tilary, Canopy Growth, and Aurora Cannabis are down more than 50% from a year ago.

Many big companies that have invested in cannabis businesses are also down more than 10% from a year ago, including Altria Group, AbbVie, Molson Coors Brewing and Constellation Brands.

By comparison, the benchmark S&P 500 index is up 15.4% this year and hovering slightly above where it stood 12 months ago.

A less welcoming stock market can limit a company's ability to raise capital by issuing stock. MedMen noted that a large portion of PharmaCann's cultivation and manufacturing assets requires "significant capital expenditures."

"There's been a lot less ability to go to the markets and raise capital, so investors are scrutinizing the balance sheets of public companies to see who's best positioned to weather the dry spell in capital markets," Burleson said.

Now that it has backed out of its bid for PharmaCann, MedMen said it intends to focus on building its retail brand and online business. In exchange for forgiving some debt, the company is taking certain cannabis licenses and other assets in Illinois and Virginia from PharmaCann.

"Looking at the PharmaCann portfolio today, Illinois has emerged as the most attractive opportunity for our longer-term, strategic growth plan," said Adam Bierman, MedMen co-founder and CEO.

___

Veiga is a member of AP's marijuana beat team. Follow the AP's complete marijuana coverage: https://apnews.com/Marijuana

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