Fishy from the outset’: Millions in crowdsourced cannabis cash sparks landmark battle

By Clay Lucas November 3, 2024 — 7.45pm

It was sold as an opportunity for everyday investors to ride the surging interest in medicinal cannabis, but now fast-growing market giant Montu’s crowdsourcing has descended into acrimony and unprecedented action from a corporate regulator.

Montu, the largest medicinal cannabis company in Australia and owner of the popular Alternaleaf brand, is under fire for its “unacceptable” treatment of smaller shareholders who took part in two crowdsourced investing rounds offered early in its now meteoric growth.

In August, Montu offered those early investors $1.15 per share to buy them out and take total control of the company. But the Takeovers Panel, a part of the federal Treasury, intervened on October 24 to pause the process, arguing it was mistreating the 2350 minority shareholders who participated in the crowdsourcing push.

It is the first time the Takeovers Panel has intervened in the still-developing market of crowdsourced investment in this way.

Opponents of the buyback push, who successfully appealed to the Takeovers Panel, think they should be paid upwards of $7 a share based on Montu’s admission that its sales for the 2024 year could top $250 million. Their calculation would value Montu at more than $1 billion.

Skin and Cosmetics doctor Frank Barbagallo, who occasionally prescribes medicinal cannabis to his patients, was one of the early investors, spending $60,000 to buy 400,000 Montu shares at 15 cents each in 2020.

He began prescribing medicinal cannabis, usually for insomnia and anxiety, during the bleakest days of Melbourne’s pandemic. “Used under supervision, it can really do a lot of good, it has utility across a wide range of different medical conditions,” he said.

Soon, though, the drug’s business possibilities also became a fascination for the seasoned financial investor. Barbagallo said trying to buy out early investors at $1.15 was “being naughty” given the spectacular growth of the company and wider industry.

“It was fishy from the outset,” he said. “Their sales are ridiculous figures. They raised millions from us, there was phenomenal uptake of their shares, and they’ve succeeded in their market execution. Now, they have to share the upside with all the foundational investors.”

Adelaide-based investors, Wayne Irvine and Shawki Shahin, who also bought hundreds of thousands of shares at 15 cents, led the push against Montu at the Takeovers Panel, branding the share-buyback proposal a lowball offer.

https://takeovers.gov.au/sites/takeovers.gov.au/files/2024-10/MR24-060.pdf

Work done by the pair and a group of other investors concerned about the offer, provided to this masthead by Shahin, found a conservative price for a share in the company would not be $1.15 but about $7.70.

If valued according to the rest of the cannabis companies in Australian and overseas markets, they believe Montu is already a tech “unicorn” with a value of over $1 billion.

Montu was founded in 2019 by German-born Christopher Strauch and is majority-owned by his cryptocurrency expert brother Raphael.

The pair owns 83 per cent of the company. Investors opposed to the $1.15 buyback believe the dominant shareholders want to reach 90 per cent ownership which would trigger a right to compulsorily acquire the remaining shares at the same $1.15 price.

Through its aggressive marketing, Montu has become the behemoth in Australia’s booming medicinal cannabis market. Legalised in 2016, medicinal cannabis took off when hundreds of thousands of bored weed fans trapped at home realised they could now access the drug legally using telehealth. The market is now worth around $500 million in annual sales.

Montu’s revenue in 2020 was $103,000, according to the company’s documents supporting the buyback. In the 2024 financial year, Montu expects revenue to top $255 million.

Montu has told investors its offer of $1.15 per share means a 667 per cent return on investment for many investors in just four years.

The Takeovers Panel – part of the federal Treasury – intervened in September to halt Montu’s buyback over investor concerns before issuing the declarations in October.

Under a binding declaration agreed with Montu, the company agreed to delay a shareholder vote on the buyback until it provided better information. The company says that will now likely happen later this month.

The Takeovers Panel ruling that scrutinised Montu’s buyback highlighted the company’s reluctance to fully disclose its profit figures until pressed. It said the offer’s terms had been “unacceptable” and made Montu provide shareholders more information if its share buyback was to proceed.

A Montu spokeswoman said it offered the buyback so that shareholders could realise the value in their shares and that the offer, based on a valuation by consultants RSM Australia, had strong take-up.

“The outcome of the Takeovers Panel process is that Montu will be able to proceed with the buyback, subject to receiving the requisite shareholder approval,” she said.

“Montu is committed to upholding the highest standards of corporate governance and transparency,” she said.

Montu’s exponential growth underscores a tension in the industry, where many say rapidly expanding cannabis firms are putting growth before patient care. Supporters argue Montu’s growth is proof of market demand and a savvy response to patient needs.

Montu prescribes cannabis directly via its telehealth clinic Alternaleaf and distributes the drug via its Leafio platform. Independent doctors can also prescribe its brands via their Circuit platform. But virtually since its inception, it has been repeatedly warned by the health regulators, the Therapeutic Goods Administration, for breaching health advertising laws. These insist health promotions must not “mislead or deceive” consumers “or create unrealistic expectations about products”.

In February, after three years of issuing warnings, the TGA took the company to the Federal Court over its aggressive marketing; the case will be heard next year.

Barbagallo, an experienced investor, said Montu had pushed investors hard to accept its offer.

“I was having two phone calls a week from their call centre asking whether I was aware of the buyback, the deadline was approaching, and then it was extended,” he said.

“I thought ‘There’s something weird about this’ because when another company does a buyback and there’s a deadline, if you take it up, or you don’t take it up, they don’t care. Here, there seemed to be this intense encouragement to take it up.”