Illinois Dispensary Deals Go Cold

This story was republished with permission from Crain’s Chicago and written by John Pletz.

The acquisition of Chicago marijuana retailer Dispensary 33 went up in smoke amid a cash crunch caused by a steep decline in cannabis stocks and a sharp increase in interest rates.

Miami-based Ayr Wellness (OTC: AYRWF) said on Jan. 27 it’s not going to complete the $55 million acquisition of D33, a popular independent marijuana retailer. The deal was announced in November 2021, about a year after Ayr went public. The company’s stock peaked at $36.54 in February 2021 but now trades at $1.29 per share. That spelled disaster for a deal that was to be paid mostly in stock. Cannabis stocks have been struggling for more than a year but suffered further declines after the SAFE Banking Act failed to pass Congress.

“The cannabis market has changed significantly in the 15 months since we agreed to acquire Dispensary 33,” Ayr President David Goubert said in a statement. “Both parties have acknowledged this reality and engaged in good-faith dialogue as we came to the mutual decision to terminate the proposed arrangement.”

It’s the second time an acquisition of a Chicago company has been scuttled by changing fortunes in the industry. Not only is there a broad-based market correction, but cannabis is particularly volatile because the stocks are held largely by retail investors rather than institutions. Three years ago, the $850 million acquisition of Verano Holdings was called off after a change in fortunes for marijuana stocks.

The cancelation of the D33 deal is just one example of how large, publicly traded weed companies are scrambling to adapt to the industry’s woes. Last week, Curaleaf, which became the largest U.S. cannabis company three years ago after buying Chicago-based chain Grassroots, pulled out of California, Colorado, and Oregon, and laid off 4% of its staff and cut payroll by 10%.

States such as these, along with Michigan, are much more competitive because there are few barriers to getting a license to grow or sell marijuana. As a result, prices in those markets have collapsed. Even in Illinois, which has had among the highest marijuana prices in the nation because regulations limit the number of licenses, has seen prices fall even as other costs have risen for cannabis companies because of inflation in equipment and labor prices.

Inflation elsewhere in the economy also has put pressure on consumer spending. Although most marijuana users are still buying weed, many have traded down to lower-priced brands. Sales growth slowed in Illinois in December.

The belt-tightening by large players such as Curaleaf, which have the best access to capital, is an ominous sign for the 192 winners of new retail licenses in Illinois who are trying to get their stores open.

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