Even though the long-awaited US move to legalize cannabis still has no firm timeline, the lack of clarity is not stopping marijuana growers from continuing to make strategic moves to put themselves in position so they can take full advantage of the eventuality.
The latest example came late last week, when Canadian-based Hexo (NYSE:HEXO) (TSX:HEXO) announced it is investing in a California company. However, this means-to-an-end maneuver to allow the Canadian company, in the medium-term, to take full and immediate advantage of the biggest cannabis market in the world once federal legislation clears a regulatory path, comes at a price in the short-term.
Hexo shares fell about 27% last Friday on both the New York and Toronto stock exchanges on the news the company raised US$140 million through a public stock offering. The capital is slated for Hexo’s US venture as well as to acquire another Canadian-based cannabis company, Redecan Pharm.
The shares traced back some of those losses yesterday, closing in New York at US$2.55, up almost 10% on the day, while on the TSX, Hexo closed at C$3.24 up about 9.5% on the day.
As it stands, Canadian marijuana companies are prohibited from operating in the US, since weed is still illegal on a federal basis, despite it being legal in a growing number of individual states.
Hexo CEO Sebastien St-Louis did not identify which California company Hexo would be taking a stake in. But the plan his company has is specific.
In an interview St-Louis said:
“It is simply time to get into the market and bring the technology we’ve developed in Canada to the rest of the world. And what better place to start than California.”
The technology he is referring to is Hexo’s manufacturing of pre-roll cannabis products.
Hexo’s plan to position its entry into the US, focusing on a company operating in just one state, is different from other Canadian companies that are partnering or entering option deals to acquire equity stakes in US operators who are active in multiple states.
Tilray Signs Deal With MedMen
Continuing on the topic of strategies to gain access to the US market, Tilray (NASDAQ:TLRY) (TSX:TLRY) last week revealed it is acquiring most of MedMen Enterprises (OTC:MMNFF) convertible debt. Again, this is another means-to-an-end strategy that will eventually provide Tilray with a minority stake in the company once the US legalizes pot.
The deal will see Tilray and a group of investors purchase US$165.8 million in outstanding senior secured convertible notes that had been held by Gotham Green Partners, a New York private equity firm that focuses on cannabis investing, according to a report by BNN Bloomberg.
Upon legalization of marijuana federally in the US, this position would give Tilray a six-month period to convert the debt to equity. In the end, it will give Tilray a 21% stake in MedMen.
MedMed operates in seven US states—Arizona, California, Florida, Illinois, Massachusetts, Nevada and New York. It has 25 retail locations where it sells cannabis and holds an additional 21 retail licences.
Most of its retail activity is concentrated in California, Florida and Illinois—the three larges cannabis markets in the US based on generated revenue.
Shares of Tilray gained just over 4% yesterday, closing at US$13.37 on the NASDAQ. In the last year, the stock has gained more than 93%.