Ayr Wellness (AYR.B) CEO Jonathan Sandelman has had a full plate. Not content with building $AYR.B into a vertically integrated company “focused on delivering the highest quality cannabis products and customer experience” – he’s also Chair of Mercer Park Brands ($BRND), which on Thursday announced their qualifying transaction with a company called GlassHouse.

Boom! Enter Sandelman boasting of using Mercer Park to create “a platform that could launch the first national cannabis brands in the United States” – and now he’s got a bouncing baby post-transaction SPAC.

What to say? 6MMk ft² of greenhouse cultivation which will support 700 stores in a nationwide wholesale business (driving 21 fully vertical dispensaries in California alone), with 3 existing brands well positioned in demographic strata. Total cost? $567MM USD.

Let’s take a step back for a moment.

Most of this doesn’t exist. What does exist is a 500k ft² greenhouse and 4 dispensaries generating $53MM in sales. $50MM of that is in wholesale alone, implying that the storefronts are virtually brand new (no disclosure on them, of course). It is claimed to be EBITDA positive (woot!). And much emphasis is put upon most of the deal being cash-less (of the 3 acquisitions that comprise the deal, the only cash going out the door is $119MM for the ‘new’ greenhouse asset.

Careful reading of the presser tells us that the greenhouse they’re buying is currently producing veggies, but it’s only (only!) 3MM ft² of existing PP&E. It’ll take $90MM to repurpose that greenhouse for cannabis (sometime in 2023). To get outfit to that 6MM ft² number, they need to build 2.5MM ft² of new. Don’t worry says $BRND – that $90MM will be funded by free cash flow from operations anyhow. And with all of that EBITDA being generated in 2 years, he’ll get that new 2.5MMft² up in a jiffy.

As to those operations? They currently have 4 dispensaries in operation. Another 17 licences are supposedly coming in via a company called Element 7 – whose existence as holding company has been solely to acquire retail licenses. Cost of those licenses is $24MM.

So (assuming no redemptions, natch), Mercer predicts that they’ll have $355MM in cash, and goes on to lay out run rates and EBITDA numbers, and then comparatives on cannabis asset valuations (only 1x EBITDA multiples on revenue. 1X!!!. What a steal!).

Ok. If you’re having a feeling of deja vu here (I sure as shit am), it’s because this story might seem familiar. Let us count the ways:

1. Funded capacity. Or hey – if you don’t like it said like that, how about: ‘our capacity is fully funded’.
2. Launches the first ‘national’ brand (Select Brands anyone? Anybody? You know, the one that was going to generate $130MM-$250MM in sales in 2020, but actually did $81MM in sales and lost $34MM on those sales?)
3. Repurposed greenhouses. Modification is a one way street, and once converted, they ain’t coming back unless additional spend is made to do so. The economics of veggie production? New greenhouse build? $55/ft². Under this deal, a greenhouse in actual veggie production is worth $120/ft² ($300MM = $219MM + $90MM conversion / 2MM ft²)

We can already see how cheap veggie greenhouses are in Village Farms ($VFF) (although I don’t believe they have the capital to convert their greenhouses, nor can their balance sheet suffer a significant cash flow interruption while waiting on inter-state). Confirmation of what these assets are worth in veggie production? Unless you’ve got a cannabis company shopping for them, it’s not much.

This deal also implies that the existing 500k ft² of cannabis producing greenhouse is being bought for $636/ft² (after removing the 4 existing dispensaries).

And I’m guessing the whole thing sure as hell doesn’t hinge on 2 celebrity-lite licensing deals included in the transaction, nor adding 21 dispensaries to a mature market. It does give us a good mark on what a retail license is worth in CA though (at $1.5MM each).

Nope, this whole thing looks to be nothing more than getting ready for inter-state exports happening – and CALI weed being produced for the entire country.

Chairman Sandelman definitely has his eye on the big prize, and this would give him control of both East and West coast production facilities and distribution and retail outlets across the Glasshouse and $AYR.B asset suite.

Let’s come back to regulatory – because this is where the biggest risk lies in the short term (1-2 years). One (Sandelman) might suggest Glasshouse’ll have a big enough impact in CA – that even if 3-Tier is not implemented federally – they can capture enough market share and wholesale to make everyone rich. I don’t know. I’m skeptical about long term profitability in a mature market that has many folks in it that grow the best cannabis in the world as easily as making a french press in the morning. It’s fractured, and competitive and margin thin. Whether or not we’ll see in the longer term (>10 years) that consolidation will occur….a broad range of possibilities exist at this point. Perhaps there will be a Pepsi/Coke dichotomy emerge, but I really doubt it in the mid-term (7-10 years). The landscape is far too fluid to get very deterministic at this point.

That leaves the near-term (3-6 years), which is precisely where this deal and it’s trajectory is set to hit. While Mercer is incredibly bullish on wholesale via massive cultivation expansion (8x current production), if Congress specifically deactivates the DCC – Glasshouse will be trapped: having production capacity of 1MM lbs/yr in a State awash in production, and nowhere to go with it.

Should 3-Tier come in, those dispensaries and licences and distribution will need to be bifurcated, and wholesale it’ll likely be. The biggest risk is in both of those events happening at the same time: blocked out of exports, and verticality removed in an oversupplied state. Sounds a lot like Canada, no?

The last hinge of value: a prediction of producing at $0.27/gram. If that also sounds familiar to Canadians, it should. It’s also around what we see repurposed greenhouses in Canada putting out as a cost per gram of pure production.

What I see in this is a highly speculative regulatory/production play. I also see bankers in this (special hat tip to Sandelman channelling the ghost of $iAN’s Hadley Ford). I get tentative when I see a revenue forecast that says they’ll grow from $55MM to 6x that in 20 months, and production will increase 4 fold during the same. I’m sure the spread-sheets are glorious, and use visual basic too.

Anyone who’s been around for awhile…..this has all the hallmarks of Canada circa 2017. ‘But, but the US is different’ you say. Not according to Jon Sandelman, who betting that 3-Tier is not enacted, while DCC is left alone.

These are both the kind of activities that anti-trust measures in both Article 1 and the 21st Amendment to the US Constitution was designed manage.

This thing looks like a huge gamble, just prior to federal announcements, with the business plan culminating right when regulatory decisions would begin to be fulfilled. I see risk absolutely everywhere with this one.

Maybe think about Sandelman’s $AYR.B (in Sira & LivFree & Liberty Health) losing verticality. Perhaps $BRND is his attempt at a hedge. If so, he’d better hope the ability to wholesale nationally starts soon. It looks like his over/under is on 2023.

The preceding is the opinion of the author, and is in no way intended to be a recommendation to buy or sell any security or derivative. The author holds no position in $BRND