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Canadian cannabis giant Tilray Inc. is attempting to make inroads into the U.S. cannabis market by acquiring over US$165-million worth of debt in U.S. marijuana retailer MedMen Enterprises Inc. that could be converted into a 21-per-cent equity stake in the company if federal legalization takes place.

Tuesday’s announcement from Tilray sent the company’s stock up more than 5 per cent in after-hours trading to US$13.90.

“It’s an iconic retail brand in the U.S. and we are acquiring a stake in it for a good price. Federal legalization is in sight so we thought this is the best time to make a move,” said Irwin Simon, chairman and CEO of Tilray, in an interview with The Globe.

Tilray and other unnamed investors have formed a partnership that will assume US$165.8-million of MedMen debt, currently held by Gotham Green Partners LLC and other funds. In the event that U.S. legislators vote to approve the federal legalization of cannabis, Tilray could convert the debt it owns in MedMen into 21 per cent of voting shares of the company.

Tilray has a 68-per-cent interest in the partnership and could receive 639.5 million MedMen shares if federal legalization takes place.

In order to fund the purchase of MedMen’s short-term debt, Tilray plans to issue nine million shares to Gotham Green Partners. At Tuesday’s closing price of US$13.12 that amounts to US$118-million.

In late July, the company called on shareholders to approve the issuance of additional stock in order to fund a future acquisition. That acquisition turned out to be MedMen. But to date, Tilray has still not obtained approval from the majority of its shareholders to issue more stock. An initial vote on the share issuance proposal was scheduled for July 30, but got delayed to Aug. 19.

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Tuesday’s release states that if Tilray has not received the required stockholder approval to issue more equity by December 1 this year, it will pay Gotham Green Partners in cash rather than equity. The Nanaimo, B.C.-based company is currently sitting on approximately $500-million in cash.

Mr. Simon dismissed concerns that he might not get the necessary votes to approve the issuance of equity that will fund the deal. “The problem is 80 per cent of our shareholder base are retail shareholders, so there’s a lot of turnover and it is hard getting in touch with them,” he said. “I have a big hurdle to climb… but I am going to get it, he added.

The complex nature of the deal stems from the fact that cannabis companies listed on U.S. exchanges, such as Tilray, are not allowed to invest in the U.S. cannabis industry until cannabis is classified as a legal drug at the federal level. The drug is legal for recreational or medical use in most U.S. states, but not nationally.

Mr. Simon told The Globe that the MedMen deal was the first step for Tilray to eventually acquire the entire company.

MedMen holds 21 retail licences across its 25 locations in Los Angeles, San Francisco, Chicago, Las Vegas and Boston. The California-based pot retailer was once one of the most well-known cannabis companies south of the border, but a series of class-action lawsuits alleging that senior management engaged in fraudulent self-dealing and labour law violations brought the company to its heels in 2019. Its stock price plummeted 90 per cent over the course of a year, and MedMen was forced to borrow from Gotham Green to keep its business afloat.

Separately, MedMen announced a US$100-million investment from Canadian dealmaker Michael Serruya’s private equity firm, which would see the firm receive shares and warrants of MedMen at an agreed-upon price of 24 U.S. cents.

Moelis & Co. served as financial adviser to MedMen, while law firms Weil, Gotshal & Manges, Cassels Brock & Blackwell and Manatt, Phelps & Phillips served as legal counsel to MedMen. DLA Piper acted as legal counsel to Tilray.

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