Medmen shelves pharmacann acquisition: disaster or no matter?

One of the more reputable cannabis companies in the U.S. Is MedMen Enterprises (WKN: A2JM6N). Medmen is definitely the most glamorous of the U.S. Cannabis companies, having spent heavily on marketing and advertising in its hometown of Los Angeles. In fact, a famous Hollywood director even filmed a commercial for the company in February.

But is a Hollywood company that does an extreme amount of advertising also a sensible investment? When someone lays it on so thick, as an investor you have to make sure that the most important data is then actually true.

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The other day, MedMen hit the headlines once again with two pieces of news. The made clear in one fell swoop how risky an investment in this industry can be.

No deal with PharmaCann

Am 8. October, MedMen announced that it had completed its full acquisition of PharmaCann in the amount of 682 million. U.S. Dollar after all, a transaction that would have brought MedMen to the U.S. East Coast as well. The deal, announced exactly a year ago, was intended to transform MedMen from a primarily California- and West Coast-focused cannabis company into a U.S. Player. So what went wrong?

Too big for MedMen

While several reasons were given at once as to why the PharmaCann deal didn't work out, most of them boil down to the fact that MedMen simply expanded too quickly. Although the company would have acquired several retail sites and cultivars from PharmaCann, MedMen also said that some of those assets would have required "significant capital expenditures".

Medmen also pointed out that the value of cannabis stocks has dropped significantly across the industry since the deal was announced. This shouldn't really have a direct impact on the deal, since apparently the number of shares to be issued to PharmaCann was set regardless of the share price – but it may have influenced MedMen's decision.

More importantly, if MedMen needed to raise money to invest in these acquired assets, the decline in MedMen's stock price would have made it difficult to do just that. Cannabis companies tend to finance acquisitions by raising money through issuing equity or convertible debt, though both become more expensive as stock prices fall. So MedMen, with a share price of $1.20, was weaker than a year ago, when the stock was around $7.50.

CEO Adam Bierman said, "We don't want to raise money at stock prices that are too diluted to fund projects that are not going to be lucrative in the short or only medium term."

The CFO must go

Looking at MedMen's financials, it's easy to see why the company preferred not to go through with the capital-intensive deal. By the last reporting quarter, MedMen had about $100 million. US dollars in debt vs. Only 22 million. U.S. Dollars in cash.

So it's perhaps not encouraging that in conjunction with the PharmaCann cancellation, MedMen also announced that it will replace CFO Michael Kramer – its second CFO in less than a year (and to make matters worse, MedMen's former CFO is suing the company right now). Medmen did not give a reason for Kramer's departure, saying only that the reason was the promotion of corporate development officer Zeeshan Hyder to CFO. Already earlier this year some managers left, which is never a good sign.

The (somewhat) happy news

Medmen isn't coming out of the PharmaCann deal completely empty-handed, however. After all, you do get some PharmaCann assets. Typically, the acquiring company must pay some sort of penalty fee in a canceled transaction, but in this case, MedMen receives a retail license, a retail store and an annex facility in Illinois. The company is also getting another vertically integrated facility in Virginia.

However, the company doesn't get these assets just like that. Medmen had recently paid PharmaCann about 21 million. US dollars to prepare for the merger. So the company essentially buys the above assets for that amount, since the loan is deemed to be settled upon transfer.

A sinking ship?

Unfortunately, the canceled acquisition and CFO change are just more symptoms of the same problem, which is that MedMen seems to be expanding too fast. The company has growing liabilities, also an operating loss of 53.3 million. U.S. Dollars in the last quarter. So you can see why MedMen stock has plunged about 80% in the past year, why deals aren't happening and why key executives are leaving the company.

Management now claims it is focused on achieving greater profitability in its home market of California. But whether the new "more focused" MedMen could be profitable any time soon is rather doubtful. In the end, California still has a huge black market problem to deal with right now.

In the end, all of these factors show why investors should stay away from this stock, at least until the company proves that it can actually back up its big ambitions with good financial results.

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The Motley Fool does not own any of the stocks indicated. Billy Duberstein does not own any of the shares indicated.

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