Mostly unnoticed by the market last week, MedMen Enterprises (MMNFF) announced the expiration of the HSR Act waiting period allowing for the closing of a key acquisition. The U.S. cannabis multi-state operator (MSO) space has been on hold for months now awaiting the closing of large-scale deals. As these deals close, the MSOs will leapfrog Canadian cannabis peers with much larger stock valuations.
PharmaCann Acquisition
MedMen had announced back in December the acquisition of PharmaCann for an all-stock deal valued at ~$682 million at the time. PharmaCann shareholders will be issued 168.4 million shares in the transaction now valued at ~$330 million.
The deal promised to double the addressable market for MedMen and leaves the company with access to 12 states and 79 cannabis facilities, including 66 retail locations. Notably, the deal gives the new company access to 4 existing locations in Illinois where the state is opening up a $2-$4 billion market with the approval of recreational cannabis on January 1. The combined company has licenses for 5 dispensary stores in the state now.
Due to other acquisitions and the length of closing the PharmaCann deal, MedMen now has licenses for up to 92 retail stores with 38 operational across 12 states. The deal is positive for MedMen, but more importantly, it is an encouraging sign for other MSOs looking to close large deals. Curaleaf (CURLF), Cresco Labs (CRLBF) and Harvest Health & Recreation (HRVSF) are amongst the large MSOs looking to close deals even larger than the PharmaCann deal.
MedMen Is Not Without Problems
The problem for MedMen is the large EBITDA losses the company generates. In FQ3 reported back in May, the company had an enormous adjusted EBIDA loss of $42.6 million.
The scale is massive considering revenues were only $36.6 million and the pro-forma revenues when including this acquisition and others were only $57.0 million. The revenue base places MedMen on scale with some of the largest Canadian cannabis companies, but the company has to eliminate the losses in order for the stock to rally.
The level of corporate spending is absurd, even before adding the costs of PharmaCann. The quarterly operating expenses were $73.0 million with adjusted expenses down at $66.0 million. The disconnect between gross profits and spending is on the scale with Canopy Growth (CGC) that recently fired their founding CEO.
The company has moved to cut costs up to 20% from the FQ2 levels, but MedMen needs big margin improvements to even make that level of costs work. Investors are best off allowing this acquisition and other small-scale deals like One Love Beach Club to become incorporated into the financial results before placing the stock on a buy list.
Takeaway
The key investor takeaway is that a closing of the deal for PharmaCann by MedMen Enterprises is far more meaningful to the U.S. cannabis industry than the company itself. MedMen still needs to figure out the business model and prove to the stock market that the company can successfully manage the existing business profitably in addition to the addition of PharmaCann.
The best option is to watch the company from the sidelines and use this news to invest in other MSO stocks in a better financial position.
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