Rapid Reaction: Curaleaf, Cura deal signals cannabis companies are ‘sophisticated in their own right’

Synergies and a strengthened geographical footprint – just another day in the ever-consolidating North American cannabis industry.

That’s what investors are looking at with today’s announcement that Massachusetts-based Curaleaf is to acquire Oregon’s Cura Partners, owners of the Select brand of cannabis products, for 1.27 billion Canadian dollars ($949 million) – one of the largest deals announced so far in the industry.

“We’ve known that consolidation was coming, and it’s here,” Louis Han, director of deal flow at Oakland-based Arcview Group, told Investor Intelligence.

“While many cannabis startups aim to be acquired by more traditional brands, the Curaleaf-Cura merger stands out in a line of M&A activity in the space that shows that cannabis companies are sophisticated players in their own right.”

Deal Details

East Coast giant Curaleaf will add Select’s West Coast dominating footprint to form a company with:

  • A presence in 15 states.
  • Pro-forma 2018 revenue of more than $200 million.
  • Solid vertical infrastructure and a strong distribution network, which provide retail and wholesale heft.

Curaleaf will issue 95.6 million subordinated voting shares, giving Cura a roughly 16% stake in the company.

“The all-stock transaction structure will enable Curaleaf to preserve financial flexibility to pursue additional M&A and other strategic opportunities,” the company said in a news release.

Select will benefit from expansion into the eastern part of the country as well as cost savings from buying biomass from Curaleaf rather than from existing third parties, Russell Stanley, analyst at Beacon Securities, said in a note.

Beacon Securities kept its stock recommendation for Curaleaf at “buy” following news of the deal but increased its 12-month stock target to CA$23 from CA$21.

Competing with Canada

The move fits in with other large deals recently announced in the industry and follows the increasing trend of consolidation.

“We saw the Canopy-Acreage deal two weeks ago, and probably Cresco-Origin House is the one that is most closely paralleled to this,” Michael Freeman, equities researcher at Toronto-based Paradigm Securities told Investor Intelligence.

“These large MSOs (multistate operators) like Curaleaf can build out their presence in the country and populate their dispensaries with the best products.”

Curaleaf has been steadily moving westward, as well.

In February, Curaleaf acquired Californian cultivator and dispensary operator Eureka for $30.5 million. In March, it acquired a similar company, Acres Cannabis, in Nevada for $70 million.

“They have the balance sheet and the strength in their stock price to do this,” Freeman at Paradigm said.

The next question may be whether Curaleaf and similar U.S.-based MSOs can compete with the giants in Canada now making inroads into the country.

“Curaleaf (and similar) is going to be given a run for its money by the Canadian behemoths like Canopy and Aurora,” Freeman added.

For now, the deal is another example of cannabis companies joining forces for mutual benefit rather than hitching their interests to big players in established industries like beverages and tobacco.

Global liquor giant Constellation Brands, for example, injected a record-breaking CA$5 billion into Canopy Growth last summer.

Toronto-based cannabis group Cronos closed a CA$2.4 billion investment from tobacco giant Altria during first quarter 2019.