While the long-awaited move by the US to legalize cannabis still doesn't have a set timeline, the lack of clarity hasn't stopped marijuana growers from taking strategic steps to position themselves so they can take full advantage of the possibility.
The latest example came late last week, when Canadian-based Hexo (NYSE:) (TSX:) announced it was investing in a California company. However, this mediocre maneuver to allow the Canadian company to take full and immediate advantage of the world's largest cannabis market in the medium term once federal law clears a regulatory pathway comes at a price in the near term.
Hexo shares fell about 27% on both the New York and Toronto stock exchanges last Friday on news that the company had raised $140 million through a public offering. The capital is planned for Hexo's US venture and for the acquisition of another Canadian cannabis company, Redecan Pharm. % on the day, while on the , Hexo closed at C$3.24 up about 9.5% on the day.
As it stands, Canadian marijuana companies are banned from operating in the US, as marijuana is still illegal on a federal basis, despite being legal in a growing number of individual states. Sebastien St-Louis, CEO of Hexo, did not identify which California company Hexo would take a stake in. But his company's plan is specific.
In an interview St-Louis said:
“It's just time to enter the market and bring the technology we developed in Canada to the rest of the world. And what better place to start than California.”
The technology he refers to is Hexo's production of pre-roll cannabis products. companies collaborating or entering into option agreements to acquire equity interests in US operators operating in multiple states. US market, Tilray (NASDAQ:) (TSX:) announced last week that it is acquiring most of the convertible bonds from MedMen Enterprises (OTC:). Again, this is another middle-to-end strategy that will eventually land Tilray a minority stake in the company once the US legalizes pot.
Through the deal, Tilray and a group of investors will purchase US$165.8. million in outstanding senior secured convertible bonds held by Gotham Green Partners, a New York private equity firm focused on cannabis investments, according to a report by BNN Bloomberg. , this position would give Tilray a six-month period to convert the debt into equity. Ultimately, Tilray will acquire 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 has a further 21 retail licenses.
Most of its retail business is concentrated in California, Florida and Illinois – the three largest cannabis markets in the US by revenue generated.
Shares of Tilray gained just over 4% yesterday, closing at US$13.37 on the . In the past year, the share has increased more than 93%.
