For metrics, we examined a recent acquisition by NASDAQ-listed Tilray Inc (US:TLRY), a sophisticated purchaser acquiring cannabis stores in a buyer’s market.
The acquisition was a layered transaction, CAD$70 million in initial closing costs plus up to an additional CAD$40 million “through achievement of certain milestones”.
The $70 was payment for the 6 operational Canadian cannabis stores of 420 Investments Limited (FOUR20). The additional $40 million was for 16 “high-traffic store locations” owned by FOUR20 but not yet in operation (also in Canada). We called those cannabis “opportunities”.
From there, The Seed Investor crunched the numbers in two ways. On its simplest level, we noted that the $70 million acquisition cost worked out to $11.67 million per store – in a buyer’s market.
We then recalculated the deal through also incorporating the 16 cannabis opportunities and the additional $40 million payable should those opportunities be monetized: a discounted price of $2.5 million per cannabis opportunity.
Doing those calculations, we came up with the following results for Canada’s leading publicly-listed retailers.
More recently, we had the chance to compare those valuations, via an article from Vancouver, British Columbia. This time, new data came from the seller’s perspective – and while we are still in a buyer’s market.
To be clear: these are not operational cannabis retail stores. Like Ontario, the government of British Columbia has been abysmally slow in awarding licenses for cannabis retail stores.
Two Vancouver pot shops are listed for sale online, though they're not technically legal businesses yet.
In the ad, both businesses are described as “approval imminent” with respect to obtaining their cannabis store license from the provincial government. So why the great disparity in asking prices?
Many possibilities. One store’s approval could be much more “imminent” than the other. The store’s owners could have significantly different appraisals of the value of a store, or one seller may simply need to complete this sale more than the other (i.e. a sale of distressed assets).
More specifically, the ad for the store with the CAD$8.5 million asking price noted the strategic location of that business: right on the border between the City of Vancouver and Burnaby, a large adjoining municipality. Burnaby is already on the record as not allowing any private cannabis stores within its boundaries.
Let’s put aside the factual issues for the moment and return to the number-crunching. These stores also represent “high traffic store locations” not currently in operation, i.e. cannabis opportunities.
Even if we look at the lower asking price, CAD$1.95 million, that is quite consistent with the average of $2.5 million that Tilray paid for its own 16 cannabis opportunities.
If we look at both asking prices (and average them), we get >$5 million, more than double the opportunity cost paid by Tilray for its 16 potential cannabis stores. But let’s resist that temptation.
Let’s assume that the higher sticker price is there for a reason: it is a premium store location, and the business is close to obtaining its license.
But it’s not operational. The possibility exists that the store may never receive its license, for reasons that may not be known/visible at present.
What is the appropriate discount rate for such a potential cannabis store? Is it 30%? 50%? Without the license, it’s no longer a “cannabis opportunity”. It’s just a commercial building looking for a new purpose (and owner).
Tilray paid $11.67 million for its cannabis stores. Discount that even by 30% and we get a value of $8.2 million – below the asking price in Vancouver. If we assume that the owner of this property is not delusional, it is fully supportive of the price Tilray paid for its operational stores.
Comparing the value of commercial properties is always a tricky proposition. There is always the potential to be comparing apples with oranges.
However, whether we look at the average price per store paid by Tilray or compare the price it paid with even more recent data, we see some consistency (and clarity) in pricing these assets.
In an (irrational) cannabis bear market, where all assets are currently being discounted, we see an approximate value of CAD$11.67 million for a licensed Canadian cannabis store, and ~CAD$2.5 million per store “opportunity”.
Even at those discounted prices, Canada’s cannabis retailing leaders are dramatically under-priced versus the present value of their assets.
National Access Cannabis (CAN:META) 277% to 453% higher *
Choom Holdings (CAN:CHOO / US:CHOOF) 72% to 179% higher *
Fire & Flower Holdings (CAN:FAF / US:FFLWF) 37% to 77% higher *
(* Depending on which metric is used)
The share prices of marijuana stocks are all depressed, whether we are looking at the U.S.- or Canada-based companies. However, within the cannabis space not all opportunities are equal when it comes to capitalizing on these prices.
Among current cannabis opportunities, Canadian cannabis retailers arguably rank near the top of the investor bargains, on the eve of Phase 2 of cannabis legalization in Canada.
DISCLOSURE: Choom Holdings is a client of The Seed Investor