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Here’s What GMP Says about Curaleaf

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Curaleaf Holdings (CURA) (CURLF) had a great week. On October 30, as reported by CANTECH LETTER, GMP Securities analyst Robert Fagan restated the “Buy” rating. Also, he gave a target price of $24 Canadian dollars for the company.

This implies an upside potential of 287.72% based on the company’s closing price of $6.19 Canadian dollars on November 1. Curaleaf’s last closing price is 87.08% lower than the 52-week high price of $11.73 Canadian dollars. However, the share price is 61.60% higher than the 52-week low price of $3.88 Canadian dollars.

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The Curaleaf-Select deal is impressive

In his October 30 research note, Robert Fagan highlighted Curaleaf’s rapid progress after buying Cura Partners’ state-regulated cannabis wholesale business, Select. On May 1, Curaleaf announced this all-stock deal valued at $1.27 billion Canadian dollars or $948.8 million US dollars. The transaction will give Curaleaf access to cannabis products sold under the Select brand. Also, the company will get the associated manufacturing, processing, distribution, marketing, and retailing capabilities.

On October 30, Curaleaf announced the expiration of the waiting period under the HSR (Hart-Scott-Rodino) Antitrust Improvements Act of 1976 for this deal.  The company expects the deal to close on January 1, 2020. GMP Securities had estimated the deal closure to be in February fiscal 2020.

Also, Fagan explained the high probability of Curaleaf actually meeting its deadline target due to the latter having high visibility about the purchase timeline. Also, the analyst pointed out to Curaleaf having already secured regulatory approval for the transaction in two out of the four states where Select brand is active. Fagan sees this as a positive factor for Curaleaf’s 2020 financial estimates.

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Curaleaf amends Select deal

On October 30, Curaleaf announced certain amendments to the terms of the original deal agreement. These amendments are in accordance with the changes in market conditions since May 2019.

Accordingly, Curaleaf will now pay 55,000,000 SVS (subordinate voting shares) to Select’s equity holders at deal completion instead of the previously committed 95,555,556 SVS. The company will pay the remaining 40,555,556 SVS after it meets certain revenue targets in calendar 2020.

The Select-branded retail extract sales target has been set at $130 million. The maximum sales target is $250 million. Further, if Curaleaf beats the $300 million revenue target from sales of Select branded retail extracts in the calendar year 2020, Select equity holders will receive an earnout of up to $200 million. Curaleaf plans to raise these funds from equity dilution.

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Fagan is impressed with Curaleaf’s M&A expertise

As reported by CANTECH LETTER, Fagan is impressed with Curaleaf’s capability to modify deal terms in a fair manner for all concerned parties. The amended deal terms have provided protection to Curaleaf from downside risk. At the same time, the new terms have given Select equity holders a chance to maximize their upside.

Also, the analyst pointed out that the deal has become cheaper for Curaleaf. This will hold true even if Select-branded retail extract sales in 2020 reach $250 million. In this scenario, Curaleaf is trading at two times its 2020 EV/Sales. In this backdrop, the analyst praised Curaleaf’s M&A (merger and acquisition) expertise.

Other prominent deals

On October 31, Curaleaf announced the completion of the deal of cultivation and processing assets of Acres Cannabis. The deal was first announced on March 18, 2019. This deal expands the company’s operating cultivation facilities by 269,000 square feet. Also, it grows the processing facilities by 3,200 square feet. Also, it’s bolstered the company’s position in Nevada.

On July 17, Curaleaf announced entry into a definitive agreement to buy the largest private vertically integrated multi-state cannabis operator, GR Companies Inc. or Grassroots. The companies have finalized the deal for a cash and stock consideration of $875 million.

Following the completed transaction, Curaleaf plans to be the largest cannabis company in the world by revenue. Also, the company plans to be the largest US cannabis player based on several key operating metrics.

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An MKM analyst isn’t optimistic about Curaleaf

In September 2019, as The Fly reported, MKM Partners analyst Bill Kirk started coverage for Curaleaf with a sell rating and target price of $5 Canadian dollars. The analyst has highlighted Curaleaf’s large revenue exposure to Florida. Kirk believes this can prove to be a challenge, considering that the store productivity in the state is declining. Based on Yelp and Leafly data, Kirk highlighted the lower customer ratings of Curaleaf in a competitive market.

In October 2019, as reported by MarketWatch, Curaleaf shares fell after Kirk released a report. The report highlights the difficulties in Florida’s retail cannabis market. Kirk pointed out the 183% YoY (year-over-year) rise in stores in Florida in the week ending in October 2017. 

However, this is problematic since medical marijuana patients are growing at a much slower pace. In the week ending in October 2019, the number of medical marijuana patients only rose YoY by 115% in comparison. Kirk believes this imbalance is bad news for Curaleaf. This is because the company gets 59% of its retail sales from Florida.

As reported by MarketWatch, Kirk highlighted an estimate of only 754,335 THC (Tetrahydrocannabinol) milligram equivalent cannabis products sold in Florida in the week ending on October 17, 2019. Also, the analyst said this as the lowest weekly amount sold in the state since July 18, 2019.

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Kirk noticed the decline in ounces of flowers sold by Curaleaf for the week ending on October 17. Here, the company sold only 795 ounces of the flower. However, this is less than 1,780 ounces and 2,362 ounces sold in the previous two weeks, respectively. Kirk expects this to be an outcome of the flower supply issue at Curaleaf.

Bill Kirk’s opinions on other cannabis stocks

In September 2019, Kirk gave Cronos Group (CRON) a “Neutral” rating and a target price of $14 Canadian dollars. Also, in October 2019, Bill Kirk lowered the target price for Aurora Cannabis (ACB) from $5 Canadian dollars to $3.5 Canadian dollars.

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