Curaleaf Becomes Face Of U.S. Cannabis Sector

Curaleaf Holdings (OTCPK:CURLF) appears to be taking a page from the playbook of Aurora Cannabis (OTC:ACB) and Canopy Growth (OTC:CGC), which could result in the company becoming the face of the U.S. cannabis industry, if it continues on its growth trajectory.

Its latest acquisition of GR Companies, Inc. (Grassroots) for $875 million has propelled it into the media spotlight, albeit with the accompanying rising expectations that come with it.

Curaleaf CEO Joseph Lusardi has added to those expectations, proclaiming that when the Curaleaf acquisition closes, along with the pending Select deal, it’ll make it the largest cannabis company in the world based upon revenue and operating presence.

What I see as extremely important with Curaleaf is it has the potential to become the equivalent of Canopy Growth in the early stages of the cannabis industry, which attracted a lot of media attention and interest from institutional investors and companies looking to make deals with them.

We’ll look at the pros and cons of how that could play out for Curaleaf, and the benefits from it that should drive the share price of the company up in the near term.

Curaleaf deal

Curaleaf paid $875 million for Grassroots. Of that, $75 million was in cash, $40 million in shares of Curaleaf, and another 102.8 million in subordinate voting shares of the company.

At the time the deal was made, Curaleaf had a presence in 12 states. After the deal it’ll have operations in 19 states. A positive outcome there is most of the new states it competes in has little overlap with its existing markets. That’s important because it means there won’t be much if any cannibalization of its existing sales.

The largest markets coming with the deal are Illinois, Michigan and Pennsylvania.

Other new markets it’ll compete in are Arkansas, North Dakota, Oklahoma and Vermont. Markets it already has a presence in are Connecticut, Maryland, Nevada and Ohio. When the deal is closed Curaleaf will have a total 131 dispensary licenses, operations is 68 locations, 26 processing facilities, and 20 cultivation sites.

Largest cannabis company?

There’s a huge caveat that needs to be added to Mr. Lusardi’s assertion the deal makes it the largest cannabis company in the world based upon revenue and operating presence.

First, he was basing his declaration on the market as it was at the time the deal was made. In other words, he was grabbing data from the deal when it closes in the future, and layering over where his competition was at that time. This is important because there are three more quarters of growth left before this deal is closed and added sales are accretive to the company results, and both Canopy Growth and Aurora Cannabis will be generating a lot more revenue by that time.

As for revenue, a combined Curaleaf and Grassroots Cannabis company would have generated $250 million in 2018 revenue, and $90 million in the first quarter of 2019.

More important, his assertion about being the market leader in operating presence doesn’t make sense to me. If he’s using the metric of having access to about 177 million customers in the states Curaleaf will compete in, that’s not even close to what Aurora Cannabis has access to. Just Canada, Italy and Germany combined have more potential customers than Curaleaf will have, and Aurora competes in a lot more markets beyond those nations which brings its customers base much higher.

If he’s basing his conclusion on recreational pot exposure, than that makes some sense, as it will be the market leader there under current industry conditions. I do think Mr. Lusardi needs to be cautious in managing investor expectations though, as he’s creating a high bar that will be difficult to reach and sustain. It would have been better in my opinion to let the numbers speak for themselves, rather than overly promote them.

The Canopy Growth of America?

I believe what Curaleaf is attempting to do is separate it from the rest of the U.S. cannabis pack by taking a page from the playbook of Canopy Growth in the early growth stages of the industry.

Not only did that generate a lot of attention from investors, but it attracted interest from Constellation Brands which landed it a huge investment, and it attracted institutional investors as well. Canopy Growth gained disproportionate leverage from its deals and performance because it became the face of the industry, as did its former CEO Bruce Linton.

But as we’ve quickly found out, that’s not necessarily a good place to be in. Even so, in the short-term, by which I mean here the next year or two, this shouldn’t be a negative for Curaleaf.

Eventually the market will start looking at dilution and other cost factors, but for now, as I’ve mentioned many times in my coverage of other cannabis companies, revenue is going to be the big catalyst for the company in the near term, and that should drive the share price of the company up in the foreseeable future. If Curaleaf becomes the face of the American cannabis market, it’ll gain the same leverage Canopy Growth enjoyed for a while, and that will raise both the floor and ceiling of its share price.

Conclusion

In the near term there’s not much I can see that is negative about Curaleaf’s acquisition of Grassroots. It has catapulted it into the awareness of more investors, and the media has apparently grabbed hold of the narrative and presumably will continue to report on what is now being billed as the largest cannabis company in the world based on revenue, once the deal closes.

My belief is if Curaleaf starts to be billed as the market leader in the U.S. on a consistent basis in the media, and receives a lot more coverage than it has had in the past, this is going to be a powerful lever that will be a powerful catalyst for its share price.

The eventual downside will be it’ll probably start to be overvalued, but I don’t see that happening anytime soon.

While its major acquisition spree is probably over, I think it’s still going to make efforts to enter into some smaller add-on deals, and also make an effort to enter the Colorado market. With expected sales in 2020 of $900 million for Curaleaf and $350 million for Grassroots, the company is trading at only 4 times estimated 2020 revenue. Assuming those numbers are achieved, Curaleaf has a lot more room to run, plus the additional media coverage that should make it the favorite cannabis company in the U.S.

Gary Bourgeault

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