iAnthus Enters The New York Cannabis Market; Does The $17.3 Million Acquisition Make Sense?

Earlier this month, cannabis-focused financing and advisory firm iAnthus Capital Holdings Inc IAN ITHUF announced it acquired Westchester-based Valley Agriceuticals, LLC, gaining access to New York’s nascent cannabis market.

In an industry where few investments surpass seven figures, does a $17.3 million purchase make sense?

In order to shed some light on iAnthus’ largest transaction since its inception, Benzinga spoke with CEO Hadley Ford and Viridian Capital Advisors, which tracks all deals in the North American cannabis industry.

A Huge Market

The state of New York recently added chronic pain to the list of conditions that can be legally treated with marijuana, substantially expanding the reach of its program, previously limited to a few highly-incapacitating diseases like Parkinson's and multiple sclerosis.

The reformed policy implies that this 20 million residents state will continue to see the medical marijuana patient base grow at an unprecedented pace. Interestingly enough, the New York State Department of Health decided it will award only 10 medical cannabis licenses.

See Also: Nevada Marijuana Emergency Shows The Real Size Of America's Demand For Cannabis

Early Entrants

One of the 10 licenses for marijuana production awarded in New York is already in hands of Valley Agriceuticals. This provides a clear first-entrant advantage for its new owner, iAnthus, in the state of New York.

As per generic, back of the envelope calculations, about 2 percent of these people (400,000) should be enrolled in the medical marijuana program as it hits maturity over the next three to five years, Ford told Benzinga. This means that, by conservative estimates, the firm could capture 10 percent of this market, or about $80 million of revenue per year.

“Our strategy has always been to (1) work in markets that were greenfield, where there is a restricted number of licenses and where we saw great addressable market opportunities or, (2) in more mature markets, with market-share-leaders who have a proven ability to execute,” Ford said, pointing out the former was the case in New York.

“A large population, a good medical marijuana program and a limited number of licenses set a great framework for operational success in New York – and ultimately great investment success as well,” he added, arguing that Valley Agriceuticals is a great partner, not only because of its experience in the market and the licensing process, but also due to its affiliation to one of the leading cannabis producers in Israel, Seach Ltd.

Opportunism & Opportunity

While licenses in New York are limited, so are the opportunities for profitability and expansion right now. Many producers in New York aren't making enough cash to sustain their operations, so they find themselves in need of additional capital to keep afloat until the market expands, Viridian’s President Scott Greiper told Benzinga, suggesting this had been what led Valley Agriceuticals to sell itself – and its license.

“We are seeing a continued evolution of a secondary market for trading licenses, and I believe that’s a good sign,” Greiper added, while talking about capital formation in the industry.

Now, does this particular transaction make sense?

“It was very opportunistic,” he said, noting that license acquisitions make sense as a way to penetrate new markets.

With this purchase, iAnthus will expand into its fifth U.S. market. iAnthus believes this portfolio will constitute “the largest footprint among public companies focused on licensed cannabis operations in the U.S.,” the press release on the acquisition said.

Transaction Specifics

The $17.3 million purchase of Valley Agriceuticals will be paid with $2.3 million in cash and $15 million in iAnthus shares priced at $2.00 per share. As every other transaction completed by the company, this acquisition was funded with capital raised in Canadian markets.

This is a clear trend in the U.S. cannabis industry: even though many of the larger companies are dually-listed, they still go to Canadian markets for capital due to the Federal illegality of marijuana in the U.S. and what that means in terms of raising capabilities, Greiper pointed out.

“This shows how big the gap between the U.S. and the Canadian marketplace is – from the investor perspective, and makes clear the dimension of the damage that is done by the Schedule I federal illegality,” he told Benzinga.

On the other hand, for Viridian’s Vice President Harrison Phillips, “The trend of people raising capital in Canada and deploying it in the U.S. has been going on for quite some time.”

What’s interesting here is that two of five New York licenses have switched hands at pretty low valuations – even below the money that the original licensees had raised to get these licenses.

Related Link: IAnthus CEO Talks About Raising Capital For U.S. Cannabis Companies In Canadian Markets

The Valley Agriceuticals acquisition includes roughly 136 acres of real estate zoned for the cultivation of marijuana and a 6,500-square foot cultivation and processing facility. Additionally, the license (final verification pending) stipulates Valley Agriceuticals will be entitled to operating four retail locations – dispensaries, as well as an extra 14,500 square feet of cultivation space.

While the state hasn’t publicly released the locations assigned to each licensee, Ford is “highly confident” they will get one of its dispensaries in the New York City area.

“The lead they had was very compelling,” Ford said. “The $15 million of stock used in the acquisition showed a great vote of confidence from the Valley Agriceuticals team on the iAnthus model, meaning the entrepreneurs don’t have to make a decision between marking the market today or enjoying the fruits of their labor and success through time. By picking iAnthus stock, everything they do that creates patient wellness, patient numbers, revenue, etc., will be capitalized into the public markets and they’ll be able to enjoy the benefits of that without having to figure out what to do five years from now.

“The surge in the price of our stock after the purchase shows that the market clearly saw it as an accretive transaction, which means we paid a good price, and that the potential to continue to add value going forward is tremendous,” he concluded.

Image Credit: Javier Hasse

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