Last week brought news of a huge deal: New York- and Toronto-based TerrAscend (CSE: TER) (OTCQX: TRSSF) announced a deal to purchase Michigan-based Gage Growth (CSE: GAGE) in an all-stock transaction valued at $545 million. The news accompanied a bevy of other deal announcements in the United States cannabis industry that signals the long-predicted industry consolidation is already here despite federal legalization still being a ways off.
The Dales Report sat down with Monaco to discuss the deal, as well as take the temperature of the U.S. cannabis market and make some predictions for the future.
Much of the talk around the TerrAscend-Gage deal understandably circled around the Michigan market (where Gage is based). TerrAscend believes that Michigan is the third-largest cannabis market in the United States — sales in the state reached $171 million in July, representing an annual market of about $2.1 billion. But, having already conquered Michigan, Monaco indicated Pennsylvania is where he and his colleagues at Gage have their eyes trained.
“Pennsylvania, in my humble opinion, is the number one market in the country right now,” Monaco says. He believes that the combined efforts with TerrAscend position the combined company well to dominate, mainly because of the sheer size of force. Currently, TerrAscend operates vertically integrated operations in the state and operates the Apothecarium retail chain, which maintains a presence in the state.
Monaco, and by extension, Gage, is also bullish on New Jersey, which along with Maryland and the aforementioned Pennsylvania are his top three target markets in the U.S. right now. In particular, Gage is looking to strengthen its relationship with Cookies in its new age with TerrAscend. Monaco noted that the recent entrance of Cookies to the New Jersey market was helped along by the TerrAscend-Gage deal. “They’re the Red Bull or Nike of the space,” Monaco says.
That TerrAscend has a presence in Pennsylvania, Maryland, and New Jersey is a big reason Gage partnered with the company, Monaco says. He adds that the other two states they are looking to build a presence in include Illinois and Massachusetts, saying that consumption is up in each of those markets, making them the top five in the country.
The terms of the deal were also discussed. Monaco acknowledged that, on its face, the deal doesn’t look like a smash for Gage investors but signaled there is longer-term upside in store for those willing to wait it out.
“From an objective standpoint, the premium doesn’t look that fancy or high, generally you look for a 30-35% premium in a public M&A deal,” Monaco says, referring to the 11% buyout premium on Gage shares as a result of the deal.
Monaco says that for Gage, it signals where TerrAscend’s stock will be “over the next little while.” He indicates there will be a “phenomenal ramp up coming in New Jersey,” which just went adult-use legal and expects that market will come online in February 2022.
As for the landscape of cannabis capital markets, which have seen some rough markets as of late, especially during Summer 2021, Monaco is bullish, overall.
“I’m bullish. I’m bullish on change. You hear a lot of rumors, the news with Merrill for potential to bring clients back with the volatility of the cannabis space — this is really a transformation if you take a look at custodial issues, the fact that we’re not on a U.S. recognized exchange, if you look at the cost of capital,” Monaco says. “All of the problems with those specifics will be easily fixed with a little bit of regulatory change. So, we are really bullish on that change happening soon.”
“All of this regulatory change,” he says, referring to outstanding legislative changes like the MORE act, “was expected to come a bit sooner,” Monaco conceded, noting that cannabis investors and companies alike hoped for more definitive regulatory changes in the beginning of 2021.
“We saw a lot of cannabis companies perform well during that market, during the hype and excitement. I think that comes back soon,” Monaco says. “That change is coming within the next 12 months.” He adds that full-scale change, like federal legalization, he expects is on a longer time horizon.
Overall, the deal can be taken as a sign that things are indeed ramping up in U.S. cannabis, despite how things are playing out in capital markets. Monaco notes the deal came along fairly quickly and is a result of the current business climate — negotiations started 100 days before it was formally announced to the public. As a combined entity, they’re not stopping, either.
“We are going to be pretty hungry as a combined entity,” Monaco says, adding that they will continue to snap up companies as opportunities arise, particularly in “new markets” for both TerrAscend and Gage. With time, Monaco hopes they will become the number one company in cannabis, period.