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Cannabis industry deals routinely spark competition investigations at DOJ
21 June 2019 12:42
Mergers in the cannabis industry are routinely being subject to in-depth competition probes by the US Department of Justice, MLex has learned.
Merging companies have publicly confirmed at least two deals that received so-called 'second requests' — Cresco Labs-Origin House and Cannex Capital-4Front. A third deal, MedMen-PharmaCann, also has received a second request, a MedMen executive told MLex yesterday.
Antitrust enforcers, once notified of a deal, can issue a second request for information if they have competition concerns.
The cannabis industry is in an unusual regulatory position, with several states having legalized recreational marijuana use while the substance remains illegal at the federal level.
Letters from the Justice Department have included language on the possibility that antitrust enforcers might share documents with other parts of the DOJ, MLex has learned. The US Drug Enforcement Administration, which investigates drug smuggling and distribution, is part of the DOJ.
The wording is not typical, and the investigations have prompted questions about whether the Antitrust Division is helping to lay groundwork for potential drug prosecutions. But the DOJ has indicated to companies that it is focused on competition issues, it is understood.
A DOJ spokesman declined to comment.
Cresco Labs, Origin House, MedMen and Cannex are traded on the Canadian Securities Exchange. Canada legalized recreational marijuana last fall.
MedMen’s Tak Sato, vice president of acquisitions and licensing, told MLex the company’s deal with PharmaCann received a second request in late March. The deal was announced in December. Document production is ongoing, he said.
Sato said the company has heard that other potential mergers after the PharmaCann deal also received second requests. But he said he believes the DOJ will conduct a case-by-case analysis.
“I believe our particular transaction doesn’t pose any competitive issues,” he said.
Sato also said the industry is seeing a flood of combinations and presumably the DOJ has not previously seen many requests for approval.
“I think the reason why all these transactions are getting these second requests is because this is a matter of first impression as far as the Antitrust Division having to look at combinations of cannabis companies, and that’s the main reason that, you know, that I personally believe the DOJ’s looking at this,” he said.
Sato said he hopes as these deals become more commonplace, the industry will be more like others where the DOJ issues fewer second requests.
At the time of the deal’s announcement, MedMen said after the merger and other pending transactions the combined company was expected to have a portfolio of cannabis licenses allowing it to operate 76 retail stores and 16 cultivation and production facilities. The combined company would have licenses in 12 states.
Cresco Labs and Origin House received their second request on June 10, according to Cresco. CEO and co-founder Charlie Bachtell said in a statement the company received the request “consistent with other pending transactions in the cannabis industry.”
The merger was announced in April, and Cresco said it was the largest-ever public company acquisition in the US cannabis sector. The company also said after the merger and other pending changes, the company would have operations in 11 states, with 23 facilities, more than 1.5 million square feet of cultivation and licenses to operate up to 51 retail dispensaries.
Cannex and 4Front received their second request April 18 after announcing in March that they had signed a definitive agreement to combine. The companies said they do not believe their deal raises substantial competition concerns based on other recent cannabis combinations, the presence of multiple larger competitors and limited geographic and business overlap.
But yesterday, Cannex said the companies had withdrawn their filing with the US Federal Trade Commission after determining the deal is not reportable under the Hart-Scott-Rodino Act. That decision, Cannex said, does not preclude the DOJ from investigating the merger to ensure antitrust compliance. The companies plan to close the merger by July 31.
In November, the companies said that together they would own, operate or manage six cultivation and production facilities in Washington, Illinois and Massachusetts and five retail operations in Illinois, Massachusetts, Maryland and Pennsylvania. 4Front also would be able to open and operate several more dispensaries in Massachusetts, Maryland and Pennsylvania under the Mission brand.
Mergers are sweeping the cannabis industry. In April, Canopy Growth and Acreage Holdings announced a $3.4 billion merger. Canopy indicated the companies agreed to file US antitrust paperwork, but the status isn't known.
The federal antitrust agencies are in the somewhat bizarre position of reviewing mergers in an industry that is still federally illegal to ensure they don’t harm competition.
The DOJ’s decision to open several deeper probes may indicate the agency recognizes the need to understand a nascent but consolidating industry where regulations are complex and vary state-by-state.
To review whether the cannabis deals pose a risk to competition, the agency will need to understand how to think about the geographic and product markets. That means that some deals that don’t raise obvious competition issues may be getting caught in the DOJ’s dragnet.
The DOJ does not have the FTC’s investigatory authority to do a study and learn about an industry outside of issuing second requests.
The legal situation of cannabis also creates a complication for attorneys who ordinarily assist merging companies in their antitrust review but may be concerned about the consequences of advising companies engaged in an illegal industry.
The majority of all mergers that receive second requests result in settlements with concessions, challenges by the agencies or abandonment. It isn’t yet clear whether the DOJ will ultimately find the cannabis mergers threaten competition.
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