Last week, MedMen, the Los Angeles-based chain of retail dispensaries valued at $1.6 billion, announced the biggest-ever business transaction in the still-young American marijuana industry’s history: a $682 million, all-stock takeover of PharmaCann, another company with cultivation and retail sales locations.
MedMen had yet to turn a profit as of May, when it went public on Canadian stock exchanges. Yet its purchase of PharmaCann, which doubled the company in size instantly and saw its stock price surge by nearly 35 percent, was just one in a flurry of deals that MedMen — now the largest publicly traded American marijuana company —secured in October, a month otherwise dominated by news from Canada, where multiple cannabis companies worth more than $1 billion are headquartered.
This begs the questions: Can MedMen compete with the Tilrays and Canopy Growths of the world? And if so, for how long?
Prior to the PharmaCann deal, MedMen purchased a dispensary in Emeryville, California, a small city in the Bay Area on the border of Oakland and Berkeley. On Oct. 22, MedMen announced it had purchased Buddy’s Cannabis, a San Jose, California-based dispensary, for an undisclosed sum in an all-cash deal.
Those purchases sandwiched sales of MedMen’s dispensary locations in Beverly Hills, Venice, and Las Vegas, offloadings that the company said would net it $12 million. (The dispensaries will in all likelihood remain MedMen locations for the duration; all three dispensaries will be leased back to MedMen for “market rates under long-term leases,” the company said.)
It’s not clear how much longer MedMen can sustain its current shopping spree. As Equity.Guru reported earlier this year, its IPO on the Canadian markets netted the company roughly $100 million in capital — much of which current company documents steer directly towards the private bank accounts of company executives. And by offering PharmaCann’s owners $682 million worth of company stock for their company — a figure that exceeds MedMen’s market capitalization, by every metric — it’s also not clear how much more runway MedMen has to play with.
It’s also worthwhile to properly assess the deal. According to an interview with New Cannabis Ventures, PharmaCann had $12 million in sales in 2017, spread across 12 dispensaries and four cultivation/processing facilities in four states. That figure was expected to triple in 2018.
As SeekingAlpha observed, MedMen paid about 19 times PharmaCann’s forward annualized revenue, while valued itself at 24 times its forward annualized revenue. This is an important figure to consider when discussing cannabis stocks, because for now, all companies in the cannabis sector enjoy stupendous valuations in spite of low revenue figures. (MedMen, remember, has yet to turn a profit.)
The key takeaway to remember is that all cannabis stocks are speculative — they are long- or medium-term bets on companies’ abilities to grow. And at least in the market’s eyes, this is normal behavior. This is exactly what you want — it is, after all, how Silicon Valley behaves. There is tremendous investor interest in “growth companies” like Uber, which lost $4.5 billion in 2017, and Amazon, which has recorded a mere $8 billion in profit since its founding 20 years ago.
And for now, after Canada’s marijuana legalization went live on Oct. 17, the biggest growth companies in cannabis are all American. Marijuana is still illegal on the federal level in America, where the tax code punishes cannabis companies, who can’t solicit investor capital in the same way a Silicon Valley firm can. There is no interstate trade in cannabis in the United States, U.S. cannabis companies can’t ship overseas like Canadian firms can. The list of drawbacks for U.S. firms is long, which means that they have tremendous growth potential when and if those restrictions are lifted.
Will MedMen be around long enough for that to happen? Probably?
It’s worth mentioning that there are signs that the still-young marijuana industry is entering what market-watchers and experts call the “consolidation phase.” Canada’s market has been consolidating for almost a year, according to some market analysts.
This could be good, because if you are the founder or a stakeholder in a company that’s acquired by a larger company, that generally means profits for you. It could also be bad, because according to some other market experts, consolidation is a sign of a late-stage economy well past the growth stage. Because there’s nowhere else to go for new markets or new customers, companies start eating each other.
It’s probably safe to assume marijuana isn’t quite atrophying yet, at least not in America, where federal law still declares cannabis illegal and where adult-use legalization has yet to become a reality in more than 40 states. These are reasons to believe that MedMen’s bonkers-big PharmaCann deal might only be the beginning.
Disclaimer: This writer has minor holdings in Canadian cannabis firms including Canopy Growth — and kind of wishes he sold some more before it tanked this week — but does not own any stock in MedMen.
TELL US, have you visited a MedMen location?