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Gage Growth acquisition puts Michigan in marijuana M&A sights

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With the latest cannabis company acquisition deal in the works, Michigan has joined the big-bucks “green rush” to consolidate the industry.

Last week,TerrAscend Corp. announced a $545 million deal to buy Gage Growth Corp., one of Michigan’s biggest marijuana sellers.

The combined company will have operations in Canada and five U.S. states, including seven cultivation and processing facilities, and 23 retail outlets serving the medical and adult-use markets. The network is set to expand to 34 stores in coming months.

The deal, subject to shareholder and regulatory approvals, is expected to close in the first half of 2022.

The rush to combine in the cannabis business stems in part from its regulatory peculiarities. Because marijuana isn’t legal at the federal level, companies have to cultivate and process it in the state in which they want to sell it. As more states legalize marijuana, companies are keen to build up a presence in new markets, helping them reach more customers and work toward building nationally recognized brands.

Legal cannabis sales in the U.S. are expected to grow about 50 percent in 2021 to exceed $24 billion, including CBD and other cannabinoids, according to data company BDSA. Michigan is the third-largest U.S. cannabis market behind California and Colorado. Marijuana sales in Michigan reached $171 million in July, representing an annual market of about $2.1 billion.

Enterprises are keen to acquire and consolidate as larger companies seek to grab market share, said Matthew Rizzo, a managing director, accountant and consultant for Bloomfield Hills-based financial and strategic advisory company O’Keefe. Without federal legality, companies have to go state by state with growth strategies.

“I can tell you that they are buying a lot of these companies for astronomical multiples,” Rizzo said. “A reason for that is because everybody’s trying to grab market share really quick so they don’t want to miss any potential opportunities …”

Gage is attractive in part because it’s vertically integrated, Rizzo said — meaning it does everything from growing to retail. And Michigan is drawing attention not just because it’s a big market, but also because cannabis prices here haven’t fallen yet like they have in states including California and Colorado that have been “milked pretty hard,” Rizzo said, and have a lot of inventory.

“It’s smart to get in now for these guys, but I don’t know for how much longer it’s going to be smart,” he added.

The deal makes sense to help propel the Gage brand into more markets and garner more access to capital, Gage CEO Fabian Monaco told Crain’s.

“Frankly, if you take a look at how the market has been trending … usually the larger entities, the ones commanding financials that are really something you just can’t ignore, those are the companies getting better cost of capital, more access to capital and frankly better opportunities … than being a standalone single state operator,” Monaco said.

Leadership including Monaco will remain on with TerrAscend, he said. He expects the Gage brand to remain, opening more stores in more states and “play(ing) a big role” in the combined company’s branding strategies moving forward.

Gage opened its 10th provisioning center last month, this one in Burton outside Flint. It joins locations from Ferndale to Traverse City. The company projects it will have a total of 20 or more stores in the state by the end of this year.

The company also has a licensing deal with California cannabis and lifestyle brand Cookies, opening a store under that name in Detroit last year. It expects to bring Cookies to more states under the TerrAscend deal. This year Gage also struck a licensing and supply deal with rapper Wiz Khalifa.

Gage has its corporate headquarters in Toronto, according to filings with the federal government, but operates the large bulk of its operations out of offices in Troy. It has nearly 400 employees and few are in Canada — just there for purposes of the public market, as cannabis companies can’t list on U.S. exchanges because marijuana remains illegal at the federal level. TerrAscend is also based in the Toronto area.

What’s now called Gage Growth started out in 2017 as Wolverine Partners Corp., according to Securities and Exchange Commission documents as of March. It formed a Michigan operation called Spartan Partners Corp. in 2018 and through subsidiaries did business in the state’s cannabis industry.

In 2019, Wolverine agreed to acquire the Gage brand from Radicle Cannabis Holdings Inc.

The same year, Wolverine bought an investment company called Rivers Innovations Inc. and said it was changing its corporate name to Gage Growth Corp. With the same announcement, it added some more expertise: cannabis industry veteran Bruce Linton as executive chairman. Linton founded and is the former CEO of Canopy Growth Corp., which was the first publicly traded cannabis company in North America, on the Toronto Stock Exchange.

Gage posted strong growth in the second quarter of 2021. The company generated a record $26.4 million in revenue, up 130 percent from the same time last year, it reported last week.

TerrAscend reported $53.4 million in total revenue for its own second quarter, up 106 percent from the same quarter the previous year.

— Bloomberg contributed to this report.

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