The American marijuana chain Curaleaf Holdings solidified its lead as the country’s biggest legal cannabis operation, saying Wednesday it has agreed to buy a privately held rival.
Curaleaf will pay cash and stock worth a total of around $900 million for GR Companies. The chain, based in the Midwest, operates 20 dispensaries under the Grassroots name and has licenses for 41 more.
Curaleaf stock (ticker: CURA.Canada or CURLF) jumped 18% Wednesday in response to the news. The Grassroots operation adds central states such as Illinois and Michigan to Curaleaf’s footprint, which has focused on the East and West Coasts.
“If you think about the map and how complementary this transaction is, there is virtually no overlap” said Curaleaf chief executive Joe Lusardi on a Wednesday conference call.
The combined entity will cover 19 states, with 68 operating dispensaries and licenses for an additional 63. Its revenues would have exceeded those of any pot producer—including Canadian leaders like Canopy Growth (CGC) and Aurora Cannabis (ACB)—at more than $250 million in 2018 and nearly $90 million in the March 2019 quarter.
Curaleaf was already on its way to outselling those Canadian producers, thanks to a deal in May to acquire the distributor of the popular Select cannabis products for $950 million in stock.
Curaleaf believes that the latest deal lifts its stock-market capitalization well above the other multistate operators in the U.S., such as Cresco Labs (CL.Canada or CRLBF). Counting the 109 million shares that will go to Grassroots, the combined outfit would have been worth $4.5 billion at Curaleaf’s closing price on Tuesday. The post-announcement move in Curaleaf stock would lift that value above $5 billion.
While Curaleaf’s valuation is a bet on bountiful growth, the U.S. operator still trades at a sharp discount to Canadian cannabis producers, who are able to be listed on the NYSE and Nasdaq because they only operate in jurisdictions where cannabis is fully legal. Curaleaf and others that sell in the U.S. states that allow cannabis are nevertheless violating federal law, so they have had to go to the Canadian Securities Exchange for stock listings.
See our cannabis valuation story: Buy Marijuana Stocks Curaleaf and Green Thumb, Not Tilray and Canopy. Here’s Why.
The consensus forecast for Curaleaf sales in 2020 is about $900 million, according to FactSet. Grassroots has been reported to be on track for 2020 sales of $350 million.
Based on those assumptions for postdeal market capitalization and sales, Curaleaf trades for four times next year’s revenue. By contrast, Canopy goes for 12 times its expected 2020 revenue.
Curaleaf chairman Boris Jordan said that his company would give an update on its 2020 outlook when it reports June quarter results in mid- to late August. That should help investors to reassess the comparative values of U.S. and Canadian pot producers.
Write to Bill Alpert at william.alpert@barrons.com
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