White-shoe law firms, top-tier investment banks, and Fortune 500 corporations are waking up to the $194 billion opportunity that is the emerging global cannabis industry.
On Friday, Altria — the tobacco behemoth behind popular brands like Marlboro — announced its intent to sink $1.8 billion into a 45% stake in Cronos Group, a NASDAQ-listed Canadian marijuana producer.
While the news of the largest tie-up yet between the cannabis and tobacco sectors is notable, the firms that advised Cronos and Altria represent a watershed moment for the fledgling industry, mergers-and-acquisitions lawyers say.
New York-based Sullivan & Cromwell, which is one of the most prestigious law firms in the world and is known for advising major corporations, represented Cronos on the deal, while the Canadian arm of investment bank Lazard served as Cronos' financial adviser.
These advisers are pushing into a growing industry that has so far been dominated by smaller Canadian investment banks like Canaccord Genuity and boutique law firms in states like Colorado and California that specifically serve cannabis clients.
In the past, blue-chip firms like Sullivan had been unwilling to take on the perceived risk of working with cannabis companies of any kind. Advising Cronos, however, provided more comfort, as the company confines its operations to countries like Canada, where cannabis is legal at the federal level, and Germany, where cannabis is legal for medical purposes.
A unique relationship between Sullivan & Cromwell and Cronos Group
Sullivan's involvement on the deal came about through a unique relationship that Cronos' CEO, Michael Gorenstein, had with the firm: He spent over three years working at the law firm before becoming a partner at the hedge fund Alphabet Ventures, after which he moved to Toronto to start Cronos in 2016.
Matthew Goodman, an associate at Sullivan who worked on the deal, told Business Insider in an interview that he and Gorenstein were in the same first-year class at the firm and spent time working on the M&A floor together. They've remained friendly since.
"We always knew Mike would move on from practicing law to do something impressive on the business side," Goodman said.
Sullivan first got involved in cannabis M&A in August, prior to the Cronos deal, said George Sampas, a partner at Sullivan who led the firm's involvement on the Cronos deal.
The firm advised Goldman Sachs, which served as Constellation Brands' financial adviser when the beer maker acquired a $4 billion stake in Canadian marijuana producer Canopy Growth.
Following that deal, Sampas said, a growing number of top-tier investment banks and law firms began to get more comfortable working with cannabis companies — albeit ones that don't operate in the US.
'A bright red line'
That means Sullivan isn't ready to advise US cannabis operators yet.
The US federal government considers cannabis an illegal, Schedule I drug, though a number of states have legalized the drug for both medical and recreational use for adults over 21.
"That's a bright red line," Sampas said. "We won't cross that."
While some US law firms, like Duane Morris and Baker Botts, have built out formal cannabis-practice groups, many of the largest firms still shy away from the industry because of the conflict between state and federal law.
As for the US law firms that have developed cannabis practices, "that's pretty buccaneering," Sampas said. He added that Sullivan has no plans yet to build out a cannabis group at the firm.
In Canada, however, it's a different story — cannabis has given Toronto's biggest law firms a boost. Canada legalized cannabis federally in October, and Toronto-based law firms have worked on more cannabis M&A deals than US firms, according to data from Dealogic.
Altria, for its part, was represented by Wachtell, Lipton, Rosen & Katz, and boutique investment bank Perella Weinberg Partners served as its financial adviser.
"Now us, Wachtell, Perella, and others have crossed over the bridge," Sampas said. "It's momentous for the cannabis industry."
- Read more:
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- The top 12 venture-capital firms making deals in the booming cannabis industry that's set to skyrocket to $75 billion
