Public Marijuana Companies Using Stock To Make Acquisitions: What Does This Trend Mean For Investors?

There’s an increasing tendency among publicly traded cannabis companies: making acquisitions using only or mostly stock, rather than cash. In fact, Benzinga recently shared a look into iAnthus Capital Holdings Inc IAN ITHUF’s $17.3 million purchase of Valley Agriceuticals. While the transaction has not been closed yet, the companies announced the payment will be completed with $2.3 million in cash and $15 million in iAnthus shares priced at $2.00 per share.

This was not the first big transaction where a public marijuana company used its stock to purchase another business. Actually, during a recent conversation, Alan Brochstein, author of the 420 Investor, noted there seemed to be a trend emerging. So, Benzinga reached out to the expert, and asked him about the issue.

Taking Advantage Of Public Status

Reasons to go public abound. Some companies turn to the public markets as a way of providing investors with the assurances derived from filing with a regulatory agency like the SEC; others, to raise capital or increase their liquidity. Among the top motivations to pursue an IPO, there’s also the ability to use stock as currency, mainly for acquisitions.

“This has been something that has been slow to develop in the cannabis market, in my opinion,” Brochstein said. “I think what happened was, in 2014, after the bubble popped, cannabis stocks took on their own stigma. A lot of people that would have been interested in the public markets saw the disaster and did not want to be associated with it.”

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However, this is now behind us, he added, pointing out that the market has been in fact rallying (and becoming increasingly stable) since early-2016. This does not mean that all publicly traded cannabis companies are good companies or represent worthy investments. But, some are, and do, respectively. And those are the best positioned to use their pretty valuable stock as currency for M&A.

Good Examples

To illustrate this trend, Brochstein went back to early-2015. One of the first transactions where stock was used as currency in the cannabis industry was in General Cannabis Corp CANN’s acquisition of Iron Protection Group.

“I don’t think that deal was worked out particularly well for the sellers. The stock is much lower today than it was then. But that was one example of a stock-based deal. It was kind of a one off at the time,” he said.

In August of that same year, CANOPY GROWTH CORP COM NPV TWMJF WEED completed one of the most important deals in the industry to date: the purchase of Bedrocan Canada. Again, the company used its stock to make it happen.

“I would say that was really the first solid example of how a company can use its stock,” Borchstein commented, bringing up another example where Canopy Growth used its stock to buy another company, Mettrum Health Corp MQTRF MT. This deal, announced in late-2016 and closed earlier this year, was an all-stock deal as well.

“So far, Canopy Growth has been really the only company in Canada to do that strategy, but I think we will see more of that over time,” the expert predicted.

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Returning to the United States, we come across another example of this trend: Kush Bottles Inc KSHB’s acquisition of CMP Wellness for $1.5 million in cash and 7.8 million shares. “What was beautiful about that acquisition was, just very simply, it doubled the revenues with only giving up about 25 percent additional shares in the company,” Brochstein continued.

Finally, the analyst brought up the examples of Medicine Man Technologies Inc MDCL and Terra Tech Corp TRTC, both of which have made more than one acquisition using their stock. “These acquisitions were transformational for the companies,” he voiced.

What This Means For Investors

Beyond this vogue, we wanted to know what using stock to make acquisitions means for a public company’s shareholders, given that these corporations usually issue additional stock to complete the transaction, and for a private company’s investor.

“If you are investing in a cannabis company, one of the problems has been they are all kind of very narrow and small,” he explained. “So, as a company gets a little bit bigger, it can become a little bit more diversified, and that is awesome for shareholders.”

In addition, he continued, “While companies that grow only through acquisition aren’t that interesting, dynamic companies that can also layer on acquisitions can produce way-above-industry-average growth.

“One of my concerns with the publicly traded sector remains that a lot of these stocks are expensive. But, I think it’s brilliant if you can create value by using your ‘expensive stock’ to do these acquisitions, especially is they are smart, there is a good strategic fit, and the management team that you’re picking up is qualified.”

One final element to understand is what Nick Kovacevich, CEO of Kush Bottles, has defined as, “sometimes 1 +1 equals 3.” What this means is, when a company acquires a good business, it can learn a lot from it an actually improve its own operations.

“With this shift in the market perception, where suddenly being publicly traded is not viewed negatively, we now have the potential for other companies, and not just the largest ones, to be consolidators as well. I think that it’s going to make the investing landscape much better,” Brochstein concluded.

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Image Credit: Javier Hasse