A $1 billion cannabis company? Recent deals shed light on marijuana valuations

Can the U.S. cannabis industry claim its first plant-touching “unicorn” – a company valued at $1 billion?

Captor Capital, a Toronto-based investment firm, certainly thinks so.

In January, Captor announced it entered into a nonbinding letter of intent to purchase 3% of the California-based cannabis management and investment firm MedMen Enterprises for $30 million.

The numbers indicate a valuation of roughly $1 billion, which some observers in the industry have scoffed at.

This deal and other recent M&A transactions – including two by iAnthus Capital in January – provide some insight into the current landscape for marijuana company valuations, which remain a murky and controversial area of the industry.

Determining the value of a cannabis company is extremely difficult, given the relative newness of the industry, the fact that each state has a different regulatory structure and the lack of widely used valuation benchmarks.

Valuations continue to be highly subjective – as the recent deals show – and they can differ greatly even among businesses that appear fairly identical in terms of focus, size and financials.

It’s also difficult to tell if some valuations are based on reality or are grossly inflated.

“In the business we’re talking about, market metrics are anecdotal at best,” said Colorado cannabis accountant Ron Seigneur, who has written a book on valuation techniques for plant-touching cannabis companies.

“When we do a valuation … we look at projected cash flows, we look at adjusted net assets.

“Can you show me something close to a billion dollars worth of intellectual property and license rights that you own? Probably not,” Seigneur said when asked specifically about MedMen and Captor’s investment.

Little known about MedMen valuation 

Captor Capital declined to comment about what went into the overall valuation of MedMen that led to its $30 million investment for a 3% stake.

Los Angeles-based MedMen owns cannabis-related business assets in California, Nevada and New York that have 13 licensed operations.

MedMen also manages six operations on behalf of other business entities.

Daniel Yi, communications manager for MedMen, emphasized to Marijuana Business Daily that his company did not come up with the valuation.

“We’re not saying that MedMen is worth $1 billion,” he said. “Captor said MedMen is worth $1 billion.”

Yi added that he isn’t sure how Captor came up with its metrics for valuing MedMen, though he said his firm will utilize the publicity to attract more investment money.

Some industry financial professionals questioned whether MedMen is really worth that much.

“This just seems a little overhyped to me,” Seigneur said.

“We know nothing about how they got to $1 billion other than the terms of the deal. … Let’s look at the fundamentals of the company itself, not what potentially controlling stockholders put in to hype a deal.”

Seigneur added that it’s possible MedMen will be worth $1 billion at some point – if it isn’t already – but he’d like to see “a lot more questions answered.”

There are also questions about the relationship between Captor Capital and MedMen, which could have influenced the valuation, said Matt Karnes of New York-based GreenWave Advisors, a financial analysis firm that focuses on the MJ industry.

Captor established a cannabis advisory board in December and appointed three MedMen executives to run it, including CEO Adam Bierman.

“It’s like if you were to sell your house and you were to also act as the appraiser for your house,” Karnes said when asked about potential conflicts of interest in the situation.

Yi said none of MedMen’s executives on the Captor advisory board had any sway over the company’s valuation of MedMen or its decision to invest $30 million.

He also said MedMen has other investors who have valued the company at $1 billion, but he declined to identify them.

A $30 million difference

New York-based iAnthus Capital Holdings shed some light on how it values companies after it was involved in two M&A transactions last month:

The difference in purchase price: $30 million.

iAnthus CEO Hadley Ford said a main reason for the huge gap is that each market has a different immediate profitability level.

New York isn’t as promising a market in the near term, which kept the purchase price for Citiva fairly low compared to what it paid for GrowHealthy.

“You figure out how much cash you think the machine can generate, and cash that is generated more closely to you in time is more valuable than cash generated five years from now,” Ford said.

iAnthus – which has cannabis business holdings in six states and is publicly traded in the United States and Canada (ticker symbols: ITHUF and IAN, respectively) – believes Florida’s market will be more lucrative and profitable in the near term.

It has a “better list of (qualifying MMJ conditions and) a broader list of ingestion methods,” Ford said, adding that Florida also makes it easier for doctors to recommend medical marijuana.

“We think that the near-term ability of that business to ramp from a business perspective is a lot better than New York,” Ford said. “So, hence, you wind up with a better valuation.”

“You have a much bigger addressable market than you have in New York,” he added, “and therefore you get something that trades at (a much higher price).”

On top of that, geography can be a major factor in determining the value of a cannabis company.

“If you’re going to try and compare a restrictive market to someplace like (Colorado or Oregon), it’s not going to be meaningful, because it’s apples to oranges,” said Karnes.

Whether iAnthus’ acquisitions pay off – and whether the company correctly valued the businesses it purchased – remains to be seen, observers said.

“Did they pay too much?” accountant Seigneur asked. “Only time will tell.”

John Schroyer can be reached at [email protected]

17 comments on “A $1 billion cannabis company? Recent deals shed light on marijuana valuations
  1. Clayton McCann on

    Here’s a newsflash: MedMen isn’t worth a $bn, neither is Canada’s Aurora, nor Canopy Growth. The valuation of these firms isn’t “tricky,” it’s fraud. If Canada had a federal securities investigation arm it would investigate these hucksters and charge them with fraud,and the lesser, but related, tax-fraud. But, sadly, Canada does not have a federal agency like this, and so Aurora, and Canopy Growth, and other LPs (Licensed Producers) continue to defraud investors. Emptor caveat!!! The bubble WILL burst!

    Reply
  2. Clayton McCann on

    It works like this: there are no established accounting protocols for LPs, so they just MAKE UP (e.g. the imaginary) the value of their MJ. If it improves the bottom line to fudge the value of a 1/2 LB MJ plant upward to, say $10,000, who’s gonna say otherwise? Suddenly, because you possess several hundred, hundred thousand square feet of growing space, your firm is worth over $1bn. Call BS if you like, nobody’s doing anything about this in Canada, even though it is clearly accounting fraud, intent upon defrauding investors!

    Reply
  3. Brett Von Bergen on

    Ha! Just like when I was at MJBizCon and the guy from Treez says the company is worth over a billion dollars! Essentially we could be in every store, in every state, in every country bro! What a joke!!! Their company doesn’t even pull in $20 million, let alone $1,000,000,000.00, and very unlikely given their product and competition that they would EVER reach this type of valuation. A lot of people in cannabis market are living in la la land and smoking too much of their own stuff apparently, but I also conclude most of them don’t have any business savvy or a clue about where they’ll be in 5 years.

    Reply
  4. Brett Roper on

    A non-binding letter of intent is just what it sounds like … if the planets align and both parties still agree to the terms if and when Med Men become publically trading in Canada, the investment would be made. I think Adam Bierman would agree that this announced event is still speculative in its nature and that both parties believe it is a good fit. The fact that Adam and two other Med Men executives serve as advisors on a cannabis based board for this company should insure that both parties know a good deal about each other. Time will tell but best of fortune to both as the future unfolds!

    Reply
  5. Robert Hunt on

    Understanding how to value a cannabis based business is absolutely critical and this is exactly what my team does. There is no possible way to justify a billion dollar valuation for this business no matter how you look at it. What iAnthus paid for its assets, on the other hand, is absolutely defensible.

    Reply
  6. Wayne Skip Cummins, MBA on

    the fundamental valuation of a “Cannabis Company” is no different nor any more difficult than the fundamental valuation of any other company in any other industry…the “difficult part” seems to be accepting/embracing the degree of discount that must be absorbed into the process due to the typical lack of substantive earnings track record(s)/projection(s) combined with the accoutrement of “vagary(s)/uncertainty(s)” that are the norm in and surrounding the space…doesn’t make it good or bad, just is what it is – cyclically-speaking/lifecycle-wise “green/immature”…but there seems to be a reticence throughout the sector and particularly in the valuation process to acknowledge/embrace the reality of these systematic uncertainty(s)/risk(s) and the compulsion to replace them with imprudent/misguided hubris…and from an “investment perspective”, THAT IS DANGEROUS…such underestimations can lead to/result in “overvaluations and perilous investment propositions”…while this may be concealed within the valuation process, it on the other hand is revealed in the “charts” in the form erratic price discovery/amplified volatility…which by the way, can create delicious trading opportunities – both long and short…as witnessed of late!

    Reply
    • Wayne Skip Cummins on

      five irrefutable indicators of the “bubble-condition”:

      1) the chart exhibiting a “prolonged exponentially bullish price/valuation curve”…historically, they all-way(s) look the same, all-way(s)

      2) amplified volatility demonstrated by “wildly-wide” weekly/daily/intra-day volatility…indicated in a high beta…inviting technically driven price retracement(s)…leading to perilous liquidity propositions…ultimately jeopardizing principal

      3) dubious fundamentals glossed over by/with an “unsubstantiated valuation thesis” characterized by low(or NO) alpha…flimsily supported by a far-fetched/be-dazzling exercise in transitory pseudo-intellectual circular logic that is feeble by nature…devoid/neglect-full of business/economic/financial principle(s)/tenets…and is as well mendaciously arrogant and ensconced within/mollycoddled by “group-think”

      4) “exuberant hubris abounds”…ala “the stock tip from the cab driver in Omaha” or “the investment advice from the golf caddy in Vegas” also exemplified by lunacy such as using consumer credit/margin to “position @ speculation”

      5) the “liquidity break-down(s)”…they all-way(s) burst in/thru a “liquidity crisis” contemporaneously exacerbated by negligently exceeding technological capacity/constraint(s)

      Reply
  7. Gregory Martin on

    Traders will trade, investors will invest, but the uneducated will loose. A lot of things are about to change, for the good… in some places. I’m ready… been here for a while.

    Reply
  8. Brett Roper on

    Interesting in that WEED achieved a $6.5B market cap on 03/06 (Canadian, different exchange) having projected revenues of $80M (double year on year per trend) and likely loosing $10B … from what little I know about Med Men I would suggest they will achieve a half of what WEED will chalk up revenue and p/l wise so at $1B one of these two is over or under valued? You decide but in the mean time I am sticking with my original commentary as well … Time will tell!

    Reply

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