MedMen Stock Comes to Canada
On May 29, MedMen Enterprises Inc. (CSE:MMEN) used a silent backdoor to enter the stock market. It’s called a “reverse takeover” (RTO).
Most investors have never heard of this tricky financial maneuver, but it has big implications for MedMen stock and MedMen’s valuation.
Before we get to those juicy details, let’s go over the basics.
You can find MedMen listed on the Canadian Securities Exchange (CSE) under the ticker “MMEN.” (Source: “CSE Current Stock List,” Canadian Securities Exchange, May 28, 2018.)
If you’re wondering why it is listed on the CSE rather than the (much) bigger Toronto Stock Exchange (TSE), look to the chaos of U.S.-Canada relations.
Some U.S. officials (it’s not clear who exactly) are upset that marijuana stocks listed in Canada also have facilities in California. To them, it is a violation of U.S. federal law.
Never mind that U.S. federal law is toothless in California—which has legalized marijuana at the state level—and in Canada. Somehow, some way, these regulators are causing problems for the TSE.
That’s why you’ll find most marijuana stocks on the CSE.
Now on to more important matters.
What Is a Reverse Takeover?
An RTO happens when a private firm buys a publicly traded company.
Rather than merge downward off the stock market, the private buyer (in this case, MedMen) quietly amasses a controlling stake that allows them to merge upward into the publicly traded company.
MedMen’s RTO involved a company called Ladera Ventures Corp. The oversubscribed offering raised $110.0 million on a pre-money valuation of $1.65 billion. (Source: “MedMen, Largest U.S. Cannabis Company, Begins Trading on the Canadian Securities Exchange May 29th Under Ticker Symbol ‘MMEN’,” MedMen Enterprises Inc., May 29, 2018.)
Doing this helps companies avoid the grueling process of an initial public offering (IPO). It also helps save a lot of money and get past the intense scrutiny of financial regulators.
Put another way, it’s fast and cheap.
This is good news if you’re looking for budget-conscious pot companies. After all, there are roughly 70 marijuana stocks trading in Canada. Not all of them will survive the next five years, so you want to look for the ones that keep expenses low.
I should add that sometimes, sometimes, companies use RTOs to do bad things.
For instance, a movie called The China Hustle revealed that RTOs were a commonly used tactic by Chinese fraudsters. (Source: “Reverse Takeover: How Fraudulent Chinese Companies are Deceiving U.S. Investors,” The Bassiouni Group, April 14, 2018.)
Here’s what happens: Chinese con artists scour the U.S. market for defunct shell companies—a firm that still trades on the stock market, but doesn’t do much else—in order perform an RTO.
Once they have control of the publicly traded shares, they crank up the hype machine to lure credulous investors.
Don’t worry, though, because MedMen isn’t like The China Hustle. It isn’t an unknown firm that popped into existence yesterday. You can find MedMen products and locations all over its home state of California.
MedMen Products and Locations
MedMen locations are often compared to the “Apple Store.”
Both have a pristine aesthetic that help customers feel exclusive and luxurious, even when they’re located in the middle of crowded shopping malls. The products are neatly presented and sleekly packed, making the whole transaction feel less like a covert operation and more like a trip to Banana Republic.
That is a huge advantage.
Anyone can, with enough time and money, set up medical marijuana dispensaries. But to establish a brand and a lasting connection with consumers is much more difficult.
It’s key to survival in a crowded marketplace.
I suggest checking out these locations if you live in California, New York, or Nevada. You don’t have to “light up” or buy anything when you’re there, but it might give you a sense of what I’m talking about.
There are 12 locations in total: four in Los Angeles; one each in Orange County, San Diego, and Venice Beach; one in Las Vegas; one in Manhattan; one in Buffalo; one in Syracuse; and, oddly, one on the edge of Lake Success. (Yes, that’s a real place.)
Gutsy Leadership by Adam Bierman
“By going public, MedMen gives investors a ground-floor opportunity to participate in the enormous and untapped potential of the fastest growing industry in the United States.” (Source: Med Men, op cit.)
That’s a direct quote from MedMen CEO Adam Bierman. Forget the beginning and middle of the quote for a minute. You’ll notice the two most important words came at the end.
When talking up the potential of marijuana investments, Bierman didn’t talk about Canada, which is what most pot companies are doing at the moment. He mentioned the United States. He did that intentionally.
Unless you read press releases from marijuana companies every day, you might not understand how hard firms try to avoid talking about the U.S. as a whole.
They talk about Oregon, Colorado, California, New York, or any of the 25 states that have legalized marijuana in some form. They bend sentences over backward and do anything to avoid references to Uncle Sam, because doing so reminds investors that a federal ban is still active.
Worse still, it reminds investors that Attorney General Jeff Sessions is a sworn enemy of the cannabis industry.
Bierman doesn’t seem to care.
He’s betting that more and more U.S. districts will legalize cannabis at the state level, thereby expanding the market potential of MedMen. I think that’s a bold strategy that could pay off big-time.
Some analysts are dead set against RTOs. I personally don’t have a strong view in either direction, especially when the buyer is a known quantity like MedMen. So you can bet I’ll be taking a closer look at MMEN stock.