It’s been a busy few years in American cannabis for businesses big and small, but not every development has been promising—and while 'growing pains’ occur at any size, critics say trends in Big Cannabis may already be sparking deeper concerns.
In the past year, two of the hottest financial names in cannabis, Acreage Holdings and Canopy Growth Corporation, have both achieved numerous firsts, from their portfolio size and public-trading status to their political visibility. This spring and summer, the two Canadian firms also announced and then later approved a deal for Canopy to purchase Acreage for a healthy $3.4 billion ($300 million in cash, $3.1 billion via stock) if and when the US legalizes the plant within the next seven-and-a-half year.
Put together, they’d account for a frankly colossal force in the North American cannabis market, and a powerful one globally. As The Motley Fool reported in May, responding to new of a 2.7% Acreage shareholder who contested the sale,
Assuming all of Acreage’s announced acquisitions close, the company will have a production, processing, or retail presence in 20 states, which is more than any other vertically integrated dispensary. It’ll also have licenses to more than 80 retail locations, placing it among the upper echelon of U.S. cannabis retailers, in terms of aggregate licenses held. If Congress changed its tune on marijuana, Canopy would be set from an infrastructure perspective, and Acreage would gain access to Canopy’s leading brands and substantial cash balance.
During the same window, the fast-consolidating companies have also faced numerous legal and leadership challenges, from Acreage’s alleged breach of local contract(s) to the sudden, unwanted July departure of Canopy CEO Bruce Linton.
In late August, attorneys for a New England-based medicinal and recreational cannabis company filed an demand for arbitration in Rhode Island against Acreage Holdings, its CEO Kevin Murphy, and another New England company which Acreage now mostly owns, the Wellness and Pain Management Connection (WPMC); a judge had since issued a restraining order.
This particular arbitration demand, filed on behalf of CanWell LLC by attorneys at Pryor Cashman, doesn’t just seek damages „for the respondents’ alleged breach of contract, breach of fiduciary duties, tortious interference with contract, tortious interference with business relations, and unjust enrichment,” as attorneys for CanWell explained in a statement, and for allegedly „wrongfully attempting to compete” with CanWell’s edible and topical contracts in Rhode Island and Maine.
It also provides an eight-year timeline for the Acreage CEO’s entry into the cannabis space and path toward his current position, including how CanWell CEO Terence Fracassa allegedly first brought Murphy—at the time, a founding member and managing partner for a „boutique [investment] firm focused on the emerging markets”—into the fray as an investor in WPMC, of which Acreage now owns more than 95%; and how Murphy and Fracassa joined forces to launch High Street Capital Management Partners, which would later become Acreage Holdings after Fracassa was allegedly pushed out.
The arbitration demand is one of several legal moves or probes in different states which allege, in short, that either Acreage or one of its (near-)subsidiaries have failed to honor rules or pre-existing agreements in that state.
Cincinnati Enquirer reported last month
The Ohio Board of Pharmacy, which oversees medical marijuana dispensaries, has concluded two companies violated state rules: Greenleaf Apothecaries LLC, which does business as The Botanist, and Harvest of Ohio LLC.
The board claims Greenleaf Apothecaries transferred ownership without state approval and/or misrepresented facts submitted with its dispensary application last year, according to portions of a board notice sent to the company obtained by The Enquirer through a public records request.
„The cannabis industry is rapidly growing and consolidating. It’s imperative that as companies in the space merge and form larger organizations their support for an equitable, diverse, and inclusive industry is included in any M&A plans.” says Roz McCarthy, Founder and CEO of advocacy organization Minorities for Medical Marijuana. „Companies like Acreage and Canopy Growth have an opportunity to lead the industry in this conversation. They have both respectively expressed a commitment towards equity and social justice initiatives in the industry, and now we’d like to see them actually demonstrate their desires through execution. The last thing New York or Rhode Island need are conglomerates making it more difficult for the people most harmed by prohibition to benefit from legalization.”
As Beth Healy and colleagues reported for the Boston Globe earlier this year, Acreage has already maneuvered itself into controlling a questionable (or at least question-raising) number of Massachusetts legal cannabis operations, in proportion to what the state allows.
Both Canopy and Acreage, which maintains its headquarters in New York, have significant interests in the Empire State, including Canopy’s more than $100-million investment in hemp cultivation and processing space.
According to some critics, the ongoing consolidation that we’re seeing (a.k.a. the evolution of Big Cannabis) is in many ways reminiscent of the last heavily financed, legally boundary-testing, ultimately under-informed 'big idea’ boom—and not just because of the growing tech/cannabis overlap at incubators like CanopyBoulder and others.
Last August, in light of Canopy’s partial acquisition by alcohol giant Constellation, and shortly before Canada’s legalized marketplace was set to begin, Canopy co-founder and then-CEO Bruce Linton commented in a Fireside Chat event at MJBizCon International 2018, “I get asked all the time, ‘Is there going to be consolidation?’ I think there’s going to be disintegration, [which] happens when people make promises at valuations that can’t possibly be fulfilled, because they have no off-take agreements, they have no chance of doing anything potentially other than building inventory, and probably a third of the money that’s being doled out isn’t actually ever going to turn into any inventory. And the reason is, like, it doesn’t always work.”
The Financial Post reported last summer,
The Canopy chief predicted there would be a “Google-like” company in the space, and then a battle to establish the rest of the pecking order. After that, however, there would be a “What were they thinking?” category, according to his analysis. “If you think a whole bunch of other people might fall on their face,” Linton added, “you’re quite a lot better off to have capital, because you’re actually, potentially, going to be hurt by their trip, even if you didn’t trip.”
And while a bit more critical about the deal’s risk to Constellation, a Morgan Stanley note said Thursday that the alcohol giant “is essentially buying an expensive up-front call option into an entity that is likely well positioned as a leading player (with a solid CEO Bruce Linton in our minds) in the potentially sizeable cannabis market.”
Linton has since bought more stock in Canopy, and reportedly said his firing came at „the right time.”
When contacted for comment, a representative for Canopy Growth Corporation said the company doesn’t comment on ongoing litigation.
A representative for Acreage Holdings also said the firm couldn’t comment on ongoing litigation. With regard to consolidation in the cannabis industry, Acreage’s market behaviors to date, and its pending purchase by Canopy, the representative noted that Acreage CEO Kevin Murphy, a fairly frequent public speaker, plans to address some of those very issues this Thursday, September 5, during a Fireside Chat event at MJBizCon International in Toronto.