In a move aimed at tightening an already strong grip on a storied marijuana market, Columbia Care (CCHWF 4.08%) recently announced a new acquisition in Colorado. Last month, the multi-state operator (MSO) finalized a deal to acquire vertically integrated peer Medicine Man Denver for upfront consideration of $42 million, most of which will be paid in Columbia Care stock.
Like many marijuana companies, Columbia Care likes to grow through acquisitions. It also likes the idea of dominating a local market. Owning Medicine Man helps to tick both boxes, but is it a smart deal for the company in the end?
It's not a coincidence that when marijuana companies' share prices are relatively high, they like to go shopping. We've seen this dynamic in play recently with, for example, Trulieve Cannabis' (TCNNF 0.04%) $2.1 billion deal for Harvest Health & Recreation (HRVSF) and HEXO's (HEXO) approximately $765 million purchase of Redecan.
The more clever deal-swingers can harness those fattened prices to pay for their acquisitions, which is the case with Columbia Care and Medicine Man. Of that $42 million upfront payment, only $8.4 million is to be paid in cash, with the remainder coming in the former company's stock. The total amount represents a multiple of about 4.5 times Medicine Man's forecast EBITDA, according to Columbia Care.
Medicine Man will also be eligible for additional milestone payments next year, although the terms and amounts of these were not specified.
Even with this acquisition, plus other recent and pending buys -- such as the recently closed deal for Ohio-based dispensary operator CannAscend -- Columbia Care still has a relatively bulging war chest. Thanks to successful capital raising activities, its cash holdings totaled over $176 million at the end of its most recently reported quarter.
For its $42 million, Columbia Care is obtaining one cultivation facility and a quartet of dispensaries (three of which, despite the Medicine Man name, sell only recreational weed). Of the four, one is located directly in Denver proper, two are in nearby municipalities, and one is less than an hour's drive north of the city.
Columbia Care didn't hesitate to mention that Medicine Man is doing even better than the ever-thriving Colorado cannabis market. It said that Medicine Man booked sales growth of 42% in 2020, trouncing the state's overall rate of 24%. That appears not to be a one-off, as those respective figures came in at 64% and 25% from January to May of this year. The retail locations in and around Denver -- by far the state's most populous city, as well as the capital and a key destination for visitors -- help enormously.
The Medicine Man acquisition fits in with Columbia Care's other recent deal-making, in which it's effected relatively inexpensive and small-scale buys to bolster its presence in certain states. It's not going the splashy, nine- or 10-figure buyout route HEXO and Trulieve have recently traveled.
Still, "Medicine Man will further cement our position as the leading vertically integrated operator in Colorado, in tandem with our ongoing integration of The Green Solution, and will have a positive impact on our financial performance for years to come," Columbia Care quoted its CEO, Nicholas Vita, as saying. The company didn't, however, provide detailed projections for the asset-to-be's effect on its finances.
The Green Solution was the largest vertically integrated marijuana company in Colorado, according to its acquirer, when it announced its roughly $140 million deal to purchase the business in late 2019.
Columbia Care's current opportunistic piece-by-piece acquisition strategy is a sensible one. It isn't too taxing on the finances, and judging by this latest buy, Vita and his company have a knack for swinging advantageous deals. Medicine Man should be good medicine for its new owner, helping to keep it on the list of weed stocks for investors to watch in the coming months and years.