The US cannabis retailer Curaleaf on Wednesday said it's snapping up the Chicago-based Grassroots Cannabis in an $875 million cash-and-stock deal.
The deal will fill out Curaleaf's presence in the Midwest. Once the transaction closes, Curaleaf will be the world's largest cannabis company by revenue and have a foothold in 19 states, with 131 dispensary licenses and access to 177 million people, the company said.
Curaleaf's stock jumped close to 20% on Wednesday.
Sign up for our new newsletter Cultivated, on the deals, trends, and personalities driving the multi-billion dollar global cannabis boom.
The deal is expected to close early next year, pending state approvals and possibly a Justice Department review under federal antitrust laws, Curaleaf CEO Joe Lusardi told Business Insider.
The Massachusetts-based Curaleaf has been an on an acquisition tear in the past few months. In May, the company bought Cura Partners in a $949 million all-stock transaction, adding West Coast operations in the process.
We have a strong presence on the East Coast and we're working to fill out the West Coast, Lusardi said. What we really didn't have was a Midwest presence, and so Grassroots really fills in the map.
Lusardi said Grassroots' licensed operations in Illinois, which in June became the 11th state to legalize recreational marijuana, as well as in Pennsylvania and Michigan were particularly attractive.Shayanne Gal/Business Insider
We have been very carefully studying the Midwest and those markets, Lusardi said. When he started negotiations with Grassroots' leadership team, Lusardi said, he was impressed by the business as well as the management team under CEO Mitch Kahn.
Kahn, who joined Grassroots in 2014, will take a board seat at the combined company.
Lusardi said the deal took a while to consummate, given the scale of both Grassroots' and Curaleaf's operations and the complexities involved with the cannabis industry. Because cannabis is federally illegal in the US, each state — and even each local jurisdiction — is governed by unique rules.
Eight Capital, a boutique Canadian investment bank, acted as a financial adviser on the transaction, and Stikeman Elliott LLP and Loeb & Loeb LLP were legal advisers. Grassroots was advised by Canaccord Genuity and the boutique firm Stoic Advisory, and Katten Muchin Rosenman LLP acted as a legal adviser.
While Lusardi said his focus was on executing Curaleaf's strategy to become the most accessible cannabis company in the US, he didn't rule out selling equity to a major consumer-packaged-goods company down the line.
Read more: CBD and hemp startups are using creative loopholes to skirt Facebook's ad ban. Here's how they're doing it.
The Canadian cannabis giant Canopy Growth in April entered an agreement to purchase the US-based Acreage Holdings under a novel structure in which the deal would be triggered as soon as there was a federally permissible pathway to legalization in the US.
I think the Canopy transaction is actually an interesting sort of framework for how other big CPG companies could potentially take an option on a US cannabis company, Lusardi said.
Numerous cannabis execs told Business Insider that Canopy Growth's move could spur a cross-border mergers-and-acquisitions boom in the cannabis industry.
Jonathan Sherman, a partner at the Canadian law firm Cassels Brock who led Canopy's involvement in the deal, told Business Insider in April that the deal would most likely pique interest from alcohol, tobacco, and pharmaceutical companies that weren't already in the space.
Lusardi said that if Curaleaf focused on creating value for shareholders, good things will come our way.
Curaleaf is listed on the Canadian Securities Exchange, the preferred exchange for US marijuana companies given federal illegality, and traded over-the-counter in the US.
While some US cannabis operators, including Vertical Brands, have publicly stated plans to spin off their hemp and CBD businesses to list on major US exchanges, Lusardi said Curaleaf had no immediate plans to do so.
I think, in general, our objective is for Curaleaf to list on a US exchange, full stop, Lusardi said. That's our first and highest priority, but of course we're subject to factors that are not in our control at the moment.
Hemp and hemp-derived CBD were legalized in the US via the Farm Bill late last year, though CBD as a food additive remains mired in a legal gray area. The Food and Drug Administration has put together a working group to iron out these issues.