The U.S. marijuana market remains illegal and off-limits to Canadian cannabis producers. Although states continue to pass legislation related to marijuana use, federally, nothing has changed. There is hope that there could be some reform coming soon, especially now that Democrats control both the House and Senate, but outright legalization is by no means a guarantee. President Biden hasn't suggested that legalization is a pressing item on his agenda.
However, that hasn't stopped Canadian-based cannabis companies from preparing for themselves for the moment the market opens up. Canopy Growth has had a deal in place with Acreage Holdings since 2019 -- although the companies can't complete it given the federal ban on pot. Tilray (TLRY 0.58%) made headlines last week when it announced that it had also found a partner south of the border: MedMen (MMNFF).
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Tilray acquires convertible notes of the multistate operator
Unlike the Canopy Growth's deal involving Acreage, which is tentative and for 100%, Tilray has acquired the majority of MedMen's senior secured convertible notes. Once the path is clear (e.g. legalization takes place) for Tilray to convert the notes and exercise the related warrants, the Canadian company will hold a 21% stake in the multistate operator. And if legalization takes place, that could just be the start. Tilray CEO Irwin Simon told BNN Bloomberg that his company could end up acquiring the rest of MedMen -- once it is legal to do so.
Is this a good move for Tilray?
MedMen has 25 retail locations in the U.S., in hot markets like Los Angeles and Las Vegas, which could provide Tilray with some exciting opportunities to tap into in the future. It is a bit of an interesting move for the company, however, given that MedMen has been burning through cash and incurring losses quarter after quarter. Over the past 12 months, its losses have totaled $242 million and its cash burn from operations was $61 million.
Tilray, meanwhile, reported a profit in its latest quarterly earnings for the period ending May 31 -- which was the first to include results from both Tilray and Aphria since the completion of their business combination earlier this year. It was also the ninth consecutive period in which the company reported a positive earnings before interest, taxes, depreciation, and amortization (EBITDA). MedMen has incurred an adjusted EBITDA loss totaling $34 million over the past nine months.
Overall, I would hesitate to call this a good move for Tilray as the multistate operator hasn't been generating much quarter-over-quarter sales growth (just 3.8% in its latest earnings report). Further, a high debt load makes this a fairly risky buy. The company's cash and cash equivalents as of the period ending March 27 totaled just $21.3 million -- nearly one-tenth its notes payable balance of $190 million at the time. Interest expense of more than $10 million during the quarter was more than 31% of the revenue the company generated.
Does this make Tilray a buy?
Tilray positioning itself for entry into the U.S. market will likely have many company investors excited about this recent news. However, I'm not a fan of it for a couple of reasons.
For one, I don't think that MedMen is a great partner for Tilray. The company faces many challenges and its long-term future is questionable. Acquiring it could drag down Tilray's strong bottom line and turn off many investors who bought the stock because it was one of the safer ones in the Canadian pot market.
Secondly, I'm not sold on the idea that the U.S. pot market will open up for Canadian cannabis producers anytime soon. According to a recent report from The New York Times, Biden is not known for making quick decisions and obsesses about details. And given that Senate Majority Leader Chuck Schumer is looking for big changes to marijuana, more than just some modest reform -- my bet is it will take some time for the bill or some version of it to pass (assuming it does at all). And that means there's no rush to make a deal like this, especially with a struggling company like MedMen.
Tilray doesn't own MedMen yet, and it may be that it doesn't end up converting the debt into shares. But Tilray has given investors insight into the type of business it is targeting for U.S. expansion, and it wouldn't leave me too bullish on the pot stock.
