MedMen Enterprises has price target cut at Industrial Alliance

The recent termination of a proposed merger with medical marijuana company PharmaCann is actually a positive for California-based MedMen Enterprises (MedMen Enterprises Stock Quote, Chart, News CSE:MMEN), says analyst Nav Malik of Industrial Alliance Securities.

In a Tuesday research update to clients the analyst kept his “Buy” rating for MMEN but dropped his target price from C$6.00 to C$4.00.

Announced last fall, MedMen had planned on buying Chicago-based PharmaCann, which was the first company in the state of Illinois to receive growing licenses for recreational pot sales. The original deal was to be for $682 million, making it one of the largest in the US cannabis space. (All figures in US dollars unless where noted otherwise.)

Even just a month ago, the merger looked to be going through, as both companies reported having complied with anti-trust regulators, but MedMen said in a press release on Tuesday that the mutual agreement to terminate would allow it to grow its retail brand while solidifying its status in the California market.

The split will see PharmaCann pay a fee to MedMen through the transfer of interests in four assets, three in Illinois, including a cultivation and production facility, a retail location and a retail licence, and one license in Virginia for a vertically-integrated facility. In exchange, MedMen will forgive a $21-million loan it had given PharmaCann.

“The cannabis sector has evolved tremendously since we first announced the PharmaCann transaction and based on the current macro-environment and future opportunities that exist for our business, we believe it is now in the best interest of our shareholders to deepen, rather than widen, our Company’s reach,” said Adam Bierman, MedMen co-founder and CEO, in a press release. “Looking at the PharmaCann portfolio today, Illinois has emerged as the most attractive opportunity for our longer-term, strategic growth plan. The addition of those assets, without dilution, is a win for MedMen and our shareholders.”

Malik says that the transaction is a positive for MedMen, as it allows the company on the one hand to focus on core markets rather than be compelled to put large capital investments in non-core markets in places such as Pennsylvania, Ohio and Maryland and on the other hand to avoid share dilution.

“Market conditions have changed since the agreement was first announced on October 11, 2018,” writes Malik. “At that time, the all-stock deal was valued at $682 million. Today, the transaction would have been valued at $290 million. In our view, the market shift makes it increasingly important to allocate capital efficiently.”

MedMen currently has 29 retail stores operations with licenses for 70 locations in total, with assets in key markets in California, Florida, Illinois, New York, Nevada and Massachusetts.

Malik has reduced his estimates for MMEN to reflect the elimination of PharmaCann and is now calling for fiscal 2019 revenue of $167 million (previously $205 million) and EBITDA of negative $176 million (previously negative $164 million). For 2020, he is estimating revenue of $307 million (previously $387 million) and EBITDA of negative $56 million (previously $10 million).

The analyst’s new target of C$4.00 represented a projected return of 103.0 per cent at the time of publication.