DOJ Allows MedMen To Buy PharmaCann - Great News For Origin House

|
About: MedMen Enterprises Inc. (MMNFF), ORHOF, Includes: ACRGF, CCHWF, CRLBF, CURLF, GTBIF, HRVSF, ITHUF, TCNNF, VREOF
by: Jonathan Cooper
Summary

The Department of Justice does not have antitrust objections to MedMen's purchase of PharmaCann.

Complex deal expected to close before end of the year.

Positive catalyst for other pending acquisitions, closing the Cresco Labs/Origin House pricing gap.

Origin House and MedMen share prices

Source: TMX Money.

MedMen's (OTCQB:MMNFF) acquisition of PharmaCann has been tacitly approved by the Department of Justice's antitrust division. Some hurdles remain before the deal can be completed, including a shareholder vote and satisfying regulators in Illinois and New York.

The biggest winner on this approval isn't MedMen at all - it is Origin House (OTCQX:ORHOF). Origin House's acquisition by Cresco Labs (OTCQX:CRLBF) is also under review by the Department of Justice. The approval of the MedMen/PharmaCann deal increases the odds of approval for the Origin House deal and for pending deals from Curaleaf (OTCPK:CURLF) and Harvest Health (OTCQX:HRVSF).

No Objections

“Today marks a monumental day for the cannabis industry,” said Adam Bierman, MedMen co-founder and chief executive officer. “We hope this will pave the way for other companies in what has become a highly acquisitive and dynamic industry.”

Bierman continued, “MedMen has built an enviable footprint which has cemented our brand in the largest cannabis markets in the world. Our transformative acquisition of PharmaCann will mold us into an even bigger and bolder company for our consumers. This acquisition doubles the number of states where MedMen has licenses, extending our geographic footprint and creating tremendous opportunity for our company and our shareholders. We are excited to be one step closer to closing the acquisition.”

MedMen Press Release, Sep 10th

MedMen is a retail-focused cannabis company which is seeking to capitalize on the enormous potential of the U.S. cannabis market. The domestic legal cannabis market is expected to grow from about $6 billion/year to $80 billion/year in 10 years, with a CAGR over 20%. MedMen is aiming to capture a significant portion of that market, beginning from a base in California and expanding nationwide.

PharmaCann revenue and estimated adjusted EBITDA. Source: Author based on MedMen filings.

In October 2018, MedMen agreed to purchase PharmaCann, with terms finalized in December. PharmaCann is a private multi-state cannabis company which has stores in Illinois (5), New York (4), Massachusetts (1), Ohio (1), and Maryland (1). PharmaCann also has cannabis licenses in Pennsylvania and Virginia, with their first operations opening in Q3/19 and in early 2020, respectively. The purchase is an all-stock transaction that will give PharmaCann holders approximately 168.4 million shares, worth about $345 million.

MedMen's purchase of PharmaCann has been slow to close. One delay was caused by the Department of Justice (DOJ). Antitrust regulators at the DOJ requested more information about the proposed merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. This "second request" required MedMen and PharmaCann to provide additional information to the DOJ to help the agency determine if the deal would have anti-competitive effects. This is the same process I discussed in June in Department Of Justice Delays Cresco Labs/Origin House Deal.

MedMen announced they had properly responded to the second request as of Aug. 9, as I previously discussed. This response triggered a 30-day statutory waiting period. During the waiting period, the DOJ reviewed MedMen and PharmaCann's response to determine whether the deal would harm competition. MedMen could not close on the PharmaCann acquisition during the waiting period.

The waiting period has now ended. The DOJ did not object to the MedMen/PharmaCann merger, and the deal can proceed.

Not Quite Yet

MedMen is not ready to close on PharmaCann quite yet.

MedMen expects the PharmaCann deal to close before the end of calendar 2019, which is in line with their expectations from their May 29 conference call.

To close on the PharmaCann deal, MedMen needs shareholder approval and approval from the states where PharmaCann has licenses. Two states in particular may require MedMen to sell assets: Illinois and New York.

Illinois

Illinois cannabis sales are booming - up 32% in the second quarter

Quarterly Illinois cannabis sales. Illinois had 54 to 55 dispensaries during entire period. Wholesale sales are duplicative of retail sales (wholesale cannabis is later sold at retail). Source: Author based on data from State of Illinois.

Illinois is a limited-license medical cannabis state. Illinois has granted 55 dispensary licenses, each of which allows the owner to open one dispensary. Each company is allowed to have a maximum of five dispensary licenses.

Cannabis sales in Illinois are booming. Second-quarter sales were up 32% sequentially over the first quarter, providing a strong tailwind for major Illinois cannabis companies including PharmaCann, Green Thumb (OTCQX:GTBIF), and Cresco Labs (OTCQX:CRLBF). Each of those companies has five dispensaries in Illinois.

Legal changes will strengthen the Illinois market further. In August, Illinois added new qualifying conditions for medical cannabis access, including chronic pain and migraines.

On Jan. 1, Illinois will legalize recreational cannabis. As part of that transformation, each dispensary license holder will be given an additional dispensary license. After that license doubling, Illinois will have 110 dispensary licenses and each company may have a maximum of ten dispensary licenses.

When combined with PharmaCann, MedMen has too many Illinois dispensaries. MedMen has a dispensary in Oak Park, Ill. PharmaCann has five dispensaries in Illinois, along with two cultivation facilities. Combined, they company has six dispensaries in a state with a five-dispensary limit.

It is likely that MedMen will need to sell an Illinois dispensary to close the PharmaCann transaction. MedMen is likely to sell its least desirable PharmaCann location. (Although the dispensary limit will double in January, MedMen would be better off selling their worst dispensary and having free rein to open their five new dispensaries in locations selected for recreational success.)

New York

New York is a limited-license medical cannabis state. New York granted 10 cannabis licenses to 10 different companies. Each license allows a company to build four dispensaries and one cultivation facility.

MedMen is one of 10 license holders in New York. MedMen purchased a New York licensee in January 2017 for $26.5 million and has stores in Buffalo, Syracuse, Long Island (Lake Success, N.Y.), and Manhattan.

PharmaCann is also one of the 10 license holders in New York. PharmaCann has stores in Amherst, Albany, Liverpool (suburban Syracuse), and the Bronx.

The only state where a decision really needs to be made is New York where there are only 10 of these licenses that currently exist. And between us and PharmaCann, we would hold 2 of them, and so the state of New York has a decision to make in that regard. We expect that decision sometime in the next 60 days.

Adam Bierman, MedMen CEO, third quarter conference call (May 2019)

New York does not allow companies to own more than one license. Each New York license is owned by a different company, and no licensee owns two or more licenses. Other license holders include Columbia Care (OTC:CCHWF), Acreage Holdings (OTCQX:ACRGF), Curaleaf (OTCPK:CURLF), Vireo Health (OTCPK:VREOF), Green Thumb, Cresco Labs, and iAnthus (OTCQX:ITHUF).

Back in May, MedMen expected a decision from New York within 60 days. MedMen has not provided an update on the transaction since their last earnings call. New York regulators have typically been slow to respond. For example, Cresco Labs initially expected their New York license acquisition to close in Q4/18 or Q1/19. Regulators didn't approve the transaction until last month.

I suspect that New York will not allow MedMen to have two licenses and MedMen will have to sell a license. This may not be all bad, since it would provide MedMen with cash to fund their ongoing business.

New York Licensee Acquirer Date Price ($mln)
Fiorello Pharma Green Thumb Aug/2019 $59.6
Valley Agriceuticals Cresco Labs Oct/2018 $128.0
NYCANNA Acreage Aug/2018 $45.8
Citiva Medical iAnthus Feb/2018 $18.0
Bloomfield Industries MedMen Jan/2017 $26.5

Source: Author based on company filings.

New York cannabis licenses have varied in price from $18 million up to $128 million. Most recently, Green Thumb purchased a licensee for $59.6 million. It is likely that MedMen could get at least this much for PharmaCann's New York business, if MedMen is forced to divest.

Harvest Health (OTCQX:HRVSF) and Trulieve (OTCPK:TCNNF) are the largest U.S. cannabis companies without New York licenses. Harvest is perhaps the most likely buyer, given their history of acquisitions, although Trulieve plans to add two more states by the end of the year.

The Winner? Origin House

The biggest winner from the DOJ's approval of the PharmaCann acquisition is not MedMen. Instead, the biggest winner is Origin House. As of this writing, MedMen shares are up 3% while Origin House shares are up 8%.

Origin House trades at its smallest discount to Cresco Labs shares in the past month

Origin House discount to Cresco Labs shares. Source: Author based on data from Google.

Cresco Labs ("CL")is acquiring Origin House ("OH"), paying 0.8428 Cresco Labs shares for each OH share. In June 2018, the Department of Justice sent a second request to OH/CL. Prior to this request, Origin House shares traded at a 9% discount to their equivalent in CL shares. After this request, that discount grew to 29% as the market expected a drawn-out merger process and feared a DOJ challenge might derail the deal.

Now that the DOJ has approved the larger MedMen/PharmaCann deal, investors are less worried that the DOJ will interfere with Cresco Labs' purchase of Origin House. In one day of trading, OH shares have gained 8%, moving from offering a 22% discount on CL shares to only offering a 14% discount, the smallest discount since early August.

Outlook

DOJ approval of the MedMen/PharmaCann deal was expected, but is still good news for investors in U.S. cannabis companies.

This approval increases the odds that other deals will also be approved, including Cresco Labs/Origin House, Harvest Health/Verano Holdings, Curaleaf/Select, and Curaleaf/Grassroots. Each of those deals is currently being reviewed by the Department of Justice's antitrust division after second requests. As with the MedMen/PharmaCann deal, analysts expect each of these deals will be approved by the DOJ.

Happy investing!

Disclosure: I am/we are long GTBIF, ACRGF, TCNNF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.