The US multi-state operators (MSOs) were already attractively priced stocks, but now they are consolidating the industry on the cheap. A prime example is the iAnthus Capital Holdings (ITHUF) agreement to purchase Sierra Well for ~$27.6 million. The company is purchasing private market assets for lower multiples than the related public market MSOs providing value to shareholders.
Sierra Well
The company is acquiring a business with two dispensary locations in Nevada and 20,000 square feet of cultivation/production facilities. The transaction is appealing for multiple reasons beyond expansion into a key market like Nevada.
The total consideration for Sierra Well is ~$27.6 million, comprised of ~$5.1 million in cash and $22.5 million paid in stock. The good news is that the management of WSCC isn’t looking at the transaction as cashing out of the Nevada cannabis industry. For the most part, the value in the deal is aligning WSCC to participate in the growth of iAnthus Capital and the related cannabis market in the U.S.
The second attractive part is the valuation paid. Sierra Well generated annualized revenue in the $16 million range last quarter. The deal values the company at 1.7x current sales. In addition, the company has EBITDA margins in the 20% range and positive net income.
Such EBITDA margins places the deal at less than 9x current EBITDA. The two dispensaries were started up in 2015 and 2016 so the stores are fully established and likely lack meaningful growth going forward. Regardless, iAnthus has licenses for a total of six dispensaries in Nevada plus the MBX wholesale business, including concentrates and edibles. The 100 employees from Sierra Well will help the company build out the remaining market opportunity without having to start the business up from scratch.
Already Cheap
iAnthus already had a cheap stock and this deal only adds to the attractive scenario while the stock is beaten down to nearly $2. The stock as a current market value in the $500 million range with a diluted share count near 250 million shares. As recently as March, iAnthus traded up near $6.
The deal brings the revenue estimates for 2020 to over $300 million leaving the stock trading below 2x updated FY20 revenue estimates. The company has a lot of growth potential via new Florida locations and building out presences in Massachusetts, New York, New Jersey and now Nevada.
The acquisition “could offer interesting valuation accretion,” said GMP analyst Robert Fagan, as he reiterates a Buy rating on iAnthus stock, with a C$9.00 price target. (To watch Fagan’s track record, click here)
Takeaway
The key investor takeaway is that iAnthus Capital made a strong acquisition that helps grow their presence in a key market at an attractive price. Investors should take note how the company provided the financial details of the acquisition unlike most other deals in the cannabis sector.
These small U.S. MSOs continue to build sizable businesses under the radar of the major financial media and markets. Continued market growth and state by state legalization of cannabis will provide avenues for strong growth at iAnthus. Going forward while the market isn’t pricing the stock at the typical premium valuation of other cannabis stocks, the company actually warrants the premium with revenue growth in excess of 100% without aggressive spending.
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Disclosure: No position.
