Following the recent merger with Canadian cannabis producer Aphria, Tilray (TLRY) made no secret of his ambition to gain a foothold in the lucrative US weed market even before federal legalization comes into play.
The company delivered on its promise last week when it announced an investment in MedMen (MMNF). Tilray – together with partners – bought the optionality on convertible notes for $165.8 million, with Tilray holding 68% of the notes/warrants. This should equate to a 21% stake in the company when converted into stock. There is also an option to acquire the remaining bonds, which could eventually lead to a majority stake in the MSO.
The move is no surprise to Jefferies analyst Owen Bennett, who has often cited American optionality as key to the long-term success of Canadian LPs.
But is MedMen the right company to acquire given its well-documented financial problems? In addition, the company’s reputation has been somewhat tarnished and is not considered one of the most appealing MSOs. Bennett, however, thinks it’s a good move.
“Barring any financial issues, the MedMen brand remains recognizable in both retail and its own private label products,” the analyst said. “Such brand equity/recognition is potentially extremely valuable in a currently highly fragmented industry.”
In addition, the company’s footprint expands to 6 states, including the world’s largest pot market, California, while the financial data also appears to be “back on track”.
But Bennett also believes the move will prove an even better source of value “once combined with additional farm resources.” The analyst thinks the MedMen purchase is just the first shot fired, and expects Tilray to start shopping in the US, with more action on this front.
“Given the importance of retail in capturing US market share (providing shelf space, improving accessibility, supporting brand recognition/equity building), if Tilray were to go and acquire additional single-state/multi-state operators and establishing their brands through the MedMen retail platform could be very valuable,” the analyst summarized.
Accordingly, Bennett rates Tilray as a buy, supported by a price target of $27. This target suggests the stock will double in one year. (To view Bennett’s track record, click here)
The Street’s average price target isn’t quite as majestic, but at $19.33, the figure still represents a potential gain of 50% over a year. However, ratings are definitely more mixed; the stock achieves an average buy consensus rating, based on 4 buys versus 6 holdings. (See Tilray stock analysis on TipRanks)
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Disclaimer: The opinions expressed in this article are those of the featured analyst only. The content is for informational purposes only. It is very important to do your own analysis before making any investment.