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Morningstar | Curaleaf Expands U.S. Footprint With Acquisition of Grassroots at Good Price; Raising FVE

On July 17, Curaleaf announced the acquisition of U.S. cannabis company Grassroots for $875 million, $800 million of which will be paid in equity. On a pro forma basis, Grassroots shareholders will own about 16% of the combined company. Grassroots is a privately held, verticalized multi-state cannabis operator, and the acquisition will expand Curaleaf’s footprint to the Midwest. Grassroots generated $28 million of revenue in 2018 and $12 million in the first quarter of 2019 alone.

Combined with the anticipated completion of the Cura Partners acquisition, Curaleaf’s presence will grow from 12 states to 19 states with a combined 131 dispensary licenses, 68 operational locations, 20 cultivation facilities, and 26 processing sites.

Given that Curaleaf will use equity to fund most of the acquisition and shares trade below our fair value estimate, the deal had the potential to be value dilutive. However, we think Curaleaf paid a good price that more than offsets the use of undervalued equity. Having updated our model to include the Grassroots deal, we’re raising our fair value estimates to $11.50 and CAD 15 per share, respectively, from $10.50 and CAD 14. Our no-moat rating remains unchanged.

In response to the news, shares traded up roughly 18% at the time of writing. Nevertheless, we continue to think Curaleaf is undervalued, giving investors an opportunity for pure exposure to the U.S. cannabis market. Recreational and medicinal cannabis has penetrated just 8% and 21% of their estimated markets, establishing a long runway for demand growth.

For more details on the cannabis industry and our market forecasts, please see our observer, “Green Rush: Cannabis Market Will Grow by 9 Times by 2030 Amid Widening Legalization.”