Last year, we witnessed the biggest advancement of the cannabis movement in history. Following months of debate, Canada became the first industrialized country in the world to legalize recreational marijuana, while the number of U.S. states to have waved the green flag on medical cannabis increased to 33.
With the cannabis movement picking up steam, and a record number of Americans supporting a broad-based legalization of the drug, marijuana stocks are moving onto the next stage of their maturation process. After focusing on capacity expansion throughout most of 2018, industrywide consolidation is the name of the game in 2019 -- especially with regard to the vertically integrated dispensary model in the United States. By "vertically integrated," I mean companies that control their supply chain from seed to sale.
Vertically integrated marijuana dispensary buyouts are getting bigger and bigger in the U.S.
Earlier this year, U.S.-focused dispensary operator iAnthus Capital Holdings completed the largest U.S. pot acquisition in history when it purchased MPX Bioceutical for around $600 million. To date, this is still the largest completed transaction among pot stocks in the United States.
Of course, there are no shortage of deals that are even larger than the iAnthus-MPX buyout. Upscale dispensary chain MedMen Enterprises is currently in the process of buying privately held PharmaCann for $682 million in an all-stock deal that's expected to close in the second half of this year.
In mid-March 2019, Harvest Health & Recreation (HRVSF) announced what would, at the time, become the largest announced U.S. marijuana acquisition of a privately held company. Harvest Health, one of the very few pot stocks to be generating an operating profit, laid out plans to buy Verano Holdings for $850 million in stock. Assuming the deal gains approval from shareholders and regulators, and Harvest Health's other pending deals close, Harvest Health will have the highest number of retail licenses (130) in its portfolio of any dispensary operator.
And on April 1, Cresco Labs (CRLBF -9.09%) shocked investors when it announced that it'd be acquiring Origin House (ORHOF) for $823 million in an all-stock deal. This deal, which will allow Cresco the opportunity to push its in-house brands into more than 500 California dispensaries thanks to Origin House's growing cannabis distribution market shares in the Golden State, was the largest between two U.S.-focused publicly traded marijuana stocks. Should it close, it'll surpass the iAnthus-MPX deal for being the largest in the U.S. among two publicly traded companies.
Then Curaleaf Holdings (CURLF -2.65%) came along and changed the game on May 1.
Curaleaf makes history with its latest acquisition
This past Wednesday, Curaleaf agreed to buy Cura Partners in an all-stock deal worth $949 million (1.27 billion Canadian dollars). Assuming closure, it would be the largest U.S.-focused acquisition in history. Period! Note, I'm not including the April-announced deal by Canopy Growth to acquire Acreage Holdings for $3.4 billion, because that deal is wholly contingent on the U.S. legalizing marijuana at the federal level, which is no guarantee.
Curaleaf may not have the lead in retail licenses held, which currently belong to Harvest Health, but it does currently have more open retail locations than any other dispensary operator at 44, to go along with 12 cultivation sites and 11 processing sites spanning a dozen U.S. states. This deal will allow Curaleaf to continue to focus on growing its medical marijuana business on the East Coast, while incorporating Cura's lifestyle Select brand on the West Coast, which caters to wholesale buyers. In essence, it's a blend of high-margin medical marijuana on the East Coast, with a larger potential consumer pool via Cura's Select brand on the West Coast, which is sold in more than 900 retailers.
Under the terms of the agreement, Curaleaf will issue 95.6 million shares of common stock to acquire Cura, with Cura's investors holding a 16% stake in the newly combined company, on a pro forma basis. Additionally, Cura equity holders may be eligible for an earn-out payment of up to $200 million dependent on whether or not Curaleaf hits certain 2020 sales targets for the combined wholesale extracts business and Select-branded retail extract sales.
What's more, Curaleaf Chairman Boris Jordan noted in an interview with CNBC that this deal would make Curaleaf a dispensary operations leader in annual revenue.
Two big question marks
On the surface, this purchase looks like a no-brainer for Curaleaf. It combines two businesses that complement each other nicely and should result in operational synergies that help to drive down growing and/or operating costs. But even with "no-brainer" deals there are still questions to be answered.
First of all, we can't ignore the 800-pound gorilla in the room: U.S. marijuana legalization. Even with the public overwhelmingly in favor of giving recreational weed the green light and cannabis banking bills showing signs of life in Congress, there are zero assurances that the federal government will change its tune anytime soon (if ever). Republicans have a markedly more negative view on marijuana than Democrats, and they currently control the Senate and Oval Office.
Furthermore, removing the Schedule I classification from pot would mean no longer subjecting businesses that deal with cannabis to Section 280E of the U.S. tax code. This is what disallows marijuana businesses from taking normal corporate income tax deductions, save for costs of goods sold. Removing this "penalty" of sorts would cost the federal government billions of dollars over the next decade. In other words, it's unclear if Curaleaf is being too aggressive with a $949 million buyout when legalization is no sure thing.
The second question mark revolves around Curaleaf's decision to finance this deal entirely with its common stock. While this does leave Curaleaf with the cash to make future deals, which is something the company notes in its press release announcing the purchase of Cura Partners, these all-stock deals have become something of a long-term drain on shareholders. Even with some level of value created by absorbing Cura Partners' business, these added shares will make it that much tougher for Curaleaf to generate a meaningful per-share profit.
There's no doubt this is a game-changing acquisition. But at the same time, there are important questions left to be answered.