A Tale of Two IPOs: Not Every Cannabis Deal Is A Winner

As reported in Forbes, U.S. cannabis operators are making a move to public markets in droves this year, though some deals appear to be a bit more on-the-level than others. Investors were recently underwhelmed by the poor IPO performance of MedMen’s (CSE:MMEN) stock on the Canadian Securities Exchange (CSE), despite the California-based company being touted as the “Apple Store of Weed.” Investors were much happier with another CSE deal —that of Green Thumb Industries (GTI), an American company based in Chicago.

Both MedMen and GTI join a growing group of publicly-traded U.S. cannabis operators who are leading the charge to the public markets by listing in Canada. The two companies are by far the largest to list on the CSE in terms of market caps, and both have growing revenue as well as presence across the entire U.S.

Shortly after MedMen began discussions about a public listing, the company raised an incredible CAD$143 million —more than double what they were asking in their first round of capital. The stock began trading on May 29, and exuberant investors’ hopes were dashed as the stock opened slightly higher than the CAD$5.25 share price, but soon began dropping over the next few days. Investors have experienced a double-digit loss of 11 percent.

Unlike the western operator MedMen, GTI predominantly has operations on the east coast. They too began discussing public plans in May. Prior to going public on June 13, the company sold CAD$86 million worth of shares at CAD$7.75 per unit, and they were trading as high as CAD$10.50 following their IPO before closing at CAD$9.68 by the week’s end. Investors involved in GTI’s last capital raise saw gains of nearly 25 percent.

Why did MedMen struggle while GTI exceeded expectations? Some experts argue that much of the reason lies in the initial pricing. According to Forbes, MedMen was overpriced and ultimately could not live up to its aggressive valuation as America’s most dominant cannabis company.

GTI benefited because the price inflation of MedMen made GTI look like a bonafide deal. Furthermore, MedMen reported operating losses right after the stock began trading publicly, and that revelation certainly did not help. GTI got a stock boost by reporting a small operating loss which was much overshadowed by the company’s first-quarter U.S. sales increase of 261 percent compared to the same quarter in 2017.

Furthermore, there was heated criticism over the lucrative compensation packages offered to MedMen’s CFO and founders; after shareholder pressure, the packages were revised to be more suitable.

Listing on the Canadian exchanges seems to be the new signature move of American cannabis companies. The individual state approach to cannabis as well as staunch federal U.S. regulations drives cannabis companies across the northern border where it is much easier to find funding as well as public approval.

The global cannabis market could reach nearly $65 billion by 2024, given the new legalization movement that is sweeping the world. Investors are catching on, as $1 billion in investments were noted in the single month of January 2018. It’s astonishing, and much of that investment originated in Canada.

Starting in Canada provides a strong foothold for building a business in America since the U.S. market could be ten times larger than the Canadian market. Companies like MedMen and GTI are getting an early start that will likely give them a sizeable lead as the American cannabis market opens up in the near future.

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