Maybe the most aggressive company in the cannabis sector over the last month has been Medicine Man Tech (MDCL). The stock wasn’t even on the radar until the company made aggressive acquisitions in the last few months with deals on a daily basis in the last week. Investors should cautiously watch from the sidelines until the deals are integrated.
Aggressive Deal Making
Back on September 6, Benzinga highlighted how Medicine Man Tech bought 9 companies this year. Well, the management team went on a ramped-up spree over the next week.
The company has bought Canyon LLC, Strawberry Fields, an unnamed dispensary owner and Roots RX. Some of the deals are appealing with Canyon LLC offering premium edibles at a cost of only $5.1 million with a 2019 revenue target of $3.3 million.
Other deals such as the unnamed dispensaries in Colorado don’t appear as attractive. The company is paying $50.1 million for four operating dispensaries and a fifth under construction as the cost of roughly $10.0 million per store. The stores are projected to have attractive 35% EBITDA margins and come after the company had reportedly bought 22 dispensaries in Colorado over a period of a week.
The deal for Strawberry Fields adds another four stores plus manufacturing and cultivation facilities for $31 million. In total, the company with a listed market cap of only $140 million has purchased the following dispensaries to reach a total of 34:
- Medicine Man – 4
- Purplebees – 4
- Starbuds – 5
- Colorado Harvest – 3
- Dispensary Group – 4
- Roots Rx – 6
- Strawberry Fields – 4
The passing of House Bill 19-1090 opened up the market for cannabis industry in Colorado to attract outside investors and capital, including publicly held companies. This new legislation allows for acquisitions to take place on or after November 1, 2019.
The company has obtained large funding from Dye Capital to carry out this string of acquisitions. Dye Capital has invested $21 million via the purchase of 8 million shares. In addition, the investment firm has warrants to purchase up to 7.5 million warrants at prices of up to $3.50 per share.
Mr. Dye was named Chairman of the Board and has extensive experience in rolling up a retailer via past investments in Albertsons. His position on the board provides confidence the investment is long term in nature.
The biggest issue for small investors is that limited financial details have been provided. The company is now projecting annual revenues of $170 million with EBITDA margins in the 20% range but integrating so many different operations into one business is a daunting task.
The key investor takeaway is that Medicine Man Tech is trading at the highs near $4 as the market likes the momentum and large investor. Small investors have limited ability to analyze all of the acquisitions or the ability of this company to integrate the operations into a single entity.
The best option is to watch the stock from the sidelines until some of the hype is out of a stock that has rallied from $1 in December to $4 now.
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Disclosure: No position.