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HIGHLIGHTS
  1. MedMen cutting the amount it expects to raise in latest bought deal
  2. Volatility is making it difficult to value deals in the cannabis space
  3. More U.S. companies listing in Canada is providing options for investors

Reefer madness is alive and well among marijuana investors, analysts say, even as one of the world’s largest cannabis retailers faces a lack of investor demand for its latest offering.

California-based MedMen, which trades on the Canadian Securities Exchange under the ticker “MMEN”, announced late Friday it was cutting the total amount it expected to raise in its latest bought deal equity financing to $75-million, issuing 13.6 million shares at a price of $5.50 apiece. One week earlier, the company said it planned to raise $120-million by selling those shares at $6.80 each.

“Shortly after the [original] announcement, the global market experienced a significant selloff and as we ended last week, the investors that bought that deal would have been underwater,” MedMen CEO Adam Bierman explained. “That did not sit right with us and accordingly, we initiated a discussion with Cannacord about repricing the deal.”

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The stock has lost roughly one third of its value over the past month, with most of that decline occurring over just the past week. Rather than attributing the fall in valuations of MedMen and various other marijuana-related businesses in recent weeks to waning investor appetite for cannabis stocks, Greg Taylor argues the company is more likely suffering from a unique combination of poor timing and tapping the same well too many times.

“The space overall is still really exciting and a lot of people want to put money into it but every day you seem to get more and more new product to buy and that is just hitting the space from a supply and demand economics perspective,” said Mr. Taylor, who actively manages a $30-million Purpose Investments fund devoted exclusively to the marijuana sector, noting roughly 25 per cent of the companies in that fund are based in the United States. “Another bit of a problem for MedMen is this is their third [bought deal] this year so I think they’re getting a bit of investor fatigue where [investors are] asking how many deals are they going to keep doing?”

MedMen used to enjoy what Mr. Taylor calls a “scarcity premium” as it has long been among very few ways for investors to bet on American cannabis companies. That has changed in recent weeks, as other major U.S. players – Acreage Holdings, Curaleaf, Harvest Enterprises and Columbia Care to name a few – have also listed publicly in Canada.

In a sign that investor demand remains strong for such offerings, Curaleaf ended up nearly tripling the amount of money it intended to raise through a private placement last month, from US$150-million to roughly US$400-million.

Volatility is an increasingly common characteristic of cannabis stocks, which can make valuing deals in the space especially difficult.

“Any type of deal in this sector is challenging just given that volatility, whether it is a bought deal equity financing or trying to price [merger and acquisition activity], it is a major challenge,” said one analyst that covers the cannabis space who requested anonymity as they were not authorized to speak on the record.

Neither the analyst nor Purpose’s Taylor expect investor demand for cannabis stocks to lull anytime soon, though companies can expect to face more scrutiny as the sector matures.

“If anything I think the appetite is going to get stronger, though it is also going to become more selective,” the analyst said. “If you look at the Canadian names especially, most everyone has been able to get financed, but once you can see the winners start to separate from the losers, those who can execute on their business plans will still be able to access capital, but those that cannot, will not.”

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