Rapid Reaction: Curaleaf’s latest acquisition highlights less risk-taking by sellers

(This story has been updated to include more detail about the Curaleaf-Grassroots deal structure.)

Curaleaf continued its march to become a truly national cannabis company with its $875 million acquisition of Grassroots Cannabis, one of the largest private multistate operators (MSO) in the U.S.

While it’s another megadeal announcement for Curaleaf, which just a few months ago said it would acquire Cura Partners, the Grassroots purchase also is an indicator that sellers may be becoming less accepting of risk in these types of transactions.

Cura Partners, which owns the Select cannabis brand, agreed in May to be acquired for $949 million in an all-equity deal.

The value of the Grassroots deal has a fixed-value component and, thus, is less variable than other recent cannabis transactions.

Asked during an investor conference call to discuss details of the transaction if such fixed-value-deal terms are increasing, Curaleaf CEO Joe Lusardi noted that “it is hard to make any generalizations – each deal is its own animal.”

Specifically, Grassroots will receive a fixed value of $115 million at close, comprised of $75 million in cash and $40 million worth of Curaleaf stock as well as 102.8 million Curaleaf shares.

In contrast, the Cura Partners acquisition was entirely equity based, with 95.6 million shares and the potential for another $200 million worth of shares if certain 2020 revenue targets are achieved. This structure’s inherent risk is highlighted by the fact its value has declined by $324 million as Curaleaf shares have declined 36% since the deal was announced.

Details of the share count calculation:

Curaleaf Share Count, in millions
     Curaleaf Fully Diluted Shares March 31, 2019               453.6
+ Cura Partners Acquisition May 1, 2019                 95.6
Pro Forma Curaleaf Shares May 1, 2019               549.2
+ Grassroots Shares July 17, 2019               102.8
+ Grassroots $40m worth of Shares at $6.54/sh                   6.1
Pro Forma Curaleaf Shares July 17, 2019               658.1
Potential $200m Cura Partners Earn Out at $6.54/sh                 30.6
Potential Pro Forma 2021 Curaleaf Shares               688.7

Valuation multiples

Providing some benchmarks for valuing MSOs, the guaranteed $115 million is about 2.4X Grassroots’ first-quarter 2019 run-rate revenue of $48 million. The full amount is also 2.4X the company’s 2020 revenue target of $360 million, as cited by previous media reports.

New York-based investment bank Seaport Global expects Grassroots to contribute $125 million of revenue in 2020 for a 7X revenue multiple.

The market welcomed the deal as Curaleaf shares closed up 17% to CA$9.95 ($7.62), though shares remain 37% below the post-Cura Partners deal high of CA$15.75 on May 1.

Pro forma for the Cura Partners and Grassroots acquisitions, Curaleaf has a $5 billion market cap with about 658 million pro forma shares outstanding, before the potential $200 million earnout to Cura Partners. This earnout would not increase the share count until 2021.

The deal is expected to close in early 2020, considering that the deal may have to go through a Hart-Scott-Rodino Antitrust Improvements Act review by the Department of Justice (DOJ).

The very fact that the DOJ is potentially considering the scale of cannabis deals is indicative of the increasing normalization of the industry.

Curaleaf stated on the call reviewing the deal that it will provide a 2020 pro forma revenue target on its second-quarter results call in August. This will be the next key data point for Curaleaf’s value – and for insight into industry revenue-growth expectations for 2020.

Mike Regan can be reached at [email protected].