MedMen deal 'does not move the needle much for Tilray': analyst

·4 min read
Analysts say Tilray will need more than MedMen to hit its 2024 U.S. sales goals. (AP Photo/Richard Drew)
Analysts say Tilray will need more than MedMen to hit its 2024 U.S. sales goals. (AP Photo/Richard Drew)

Tilray (TLRY.TO)(TLRY) announced its first move into the American cannabis market late Tuesday via a deal to acquire a minority stake in retailer MedMen Enterprises (MMEN.CN), following U.S. federal legalization of cannabis. Analysts warn it may be tough for the Canadian company to strike the additional deals needed to hit its 2024 U.S. sales target of up to $1.5 billion per year, with many leading American pot firms "unlikely to engage in discussions."

Irwin Simon, chief executive officer of the Leamington, Ont.-based pot giant, has repeatedly primed expectations for a U.S.-facing deal in recent weeks involving pot, booze or consumer packaged goods.

Under the terms announced on Tuesday, Tilray and a group of unnamed strategic investors will acquire US$165.8 million worth of outstanding senior secured convertible notes previously held by the private equity firm Gotham Green Partners. Tilray will have six months to convert the debt to equity, once the U.S. legalizes cannabis, which would give the company a 21 per cent stake in MedMen.

Toronto-listed Tilray shares climbed 4.23 per cent to $17.23 at 12:03 p.m. ET on Wednesday.

The deal echoes moves by Canopy Growth (WEED.TO)(CGC) and Cronos Group (CRON.TO)(CRON), Canadian cannabis players that have struck cross-border deals with pot producers hingeing on U.S. regulatory reforms. Simon says the deal was approved by the Toronto Stock Exchange and the Nasdaq, which currently prohibit listed companies from directly investing in U.S. cannabis plant-touching assets.

MedMen was a trend-setter in U.S. cannabis retail, once lauded as the Apple Store of legal pot. The California-based company was among the first legal pot retailers to offer a premium in-store experience, with employees wearing matching red shirts and tablets for browsing cannabis products. However, MedMen became saddled with nearly $500 million in debt, and found itself embroiled in a series of controversies that ultimately led to the departure of its co-founder and CEO.

Today, the company is in the midst of a turnaround effort led by its current chief executive Tom Lynch. MedMen says it currently runs 25 retail locations with operations spanning six U.S. states, and 21 additional licences. In its latest quarter, the company reported US$32 million in sales, down 27 per cent year over year.

In a separate announcement on Tuesday, MedMen said a group of investors led by Toronto-based Serruya Private Equity bought US$100 million of the company's stock and warrants in a private placement.

"We're buying this at a really good price," Simon told analysts on a conference call Tuesday evening. "Today represents a significant step forward in our U.S. prospects."

Under the deal announced on Tuesday, Tilray will own 68 per cent of the limited partnership acquiring the bulk of MedMen's outstanding notes. The company says it will issue nine million shares of its common stock to Gotham Green Partners, if it receives approval from shareholders to increase its pool of outstanding shares. A meeting to vote on this issue is set for Thursday. Tilray will pay with cash if it does not receive approval by Dec. 1.

Simon says there is "no reason" why Tilray couldn't buy MedMen outright upon U.S. federal cannabis legalization.

Cantor Fitzgerald analyst Pablo Zuanic says MedMen would not have been his first choice among U.S. pot assets.

"MedMen does not move the needle much for Tilray, in terms of the company's vision of accumulating U.S. cannabis assets," he wrote in a note to clients.

"While MedMen is only one small step in [Tilray's] U.S. journey, with about US$120 million in sales, it lends credence to the vision outlined less than a month ago," he added, referring to Tilray's aspirations for $4 billion in sales by 2024. The company says it expects up to $1.5 billion of that figure to come from U.S. THC assets.

CIBC analyst John Zamparo says he views the deal favourably, agreeing with Simon's assertion that MedMen offers a strong brand at a competitive price. However, he notes the company has yet to turn a profit and still carries significant debt.

"We believe MedMen carries brand equity, results have improved, and asking prices from best-in-class [multi-state cannabis operators] were likely far more expensive," he wrote in a research note. "We believe the brand has real equity and should attain profitability."

BMO Capital Markets analyst Tamy Chen notes the deal allows Tilray the option of walking away if MedMen does not execute on its turnaround. She warns Canadian licensed producers looking to acquire U.S. assets appear to be limited to "work-in-progress" U.S. pot companies, with leading operators "unlikely to engage in discussions."

Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.

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