Curaleaf plan to build biggest US cannabis company faces close DOJ antitrust scrutiny

Curaleaf aims to create the US’s biggest cannabis company with its $875 million GrassRoots merger.

But it first needs antitrust clearance from the US Department of Justice. And in a year where the DOJ has issued second requests for information on nearly every cannabis merger, the chances of Curaleaf’s deal going forward without further review look slim. Plus, there may be competition overlaps in the Midwest.

Curaleaf and GrassRoots filed Hart-Scott-Rodino Act paperwork with US antitrust authorities on Aug. 14, Curaleaf’s chief executive, Joe Lusardi, said during a conference call last week, giving the DOJ until Sept. 13 to issue a second request for more information, or for Curaleaf to withdraw and refile its paperwork to give the agency more time for review.

But with the DOJ having issued a second request for information on at least seven cannabis industry mergers so far this year, with four new ones confirmed in the past two weeks, even Lusardi seems resigned to the likelihood of regulatory delay.

“We are very confident there are no competitive issues that would impede us from closing the deal ultimately, but we are realistic enough to recognize that we will have to go through the HSR process and will likely be subject to further review,” he said. “That’s why we are guiding to an early 2020 close.”

— Multiple requests —

If so, they will join a growing list of pending second requests in the cannabis space.

That includes another Curaleaf deal, the $940 million purchase of Select Brands, a West-Coast leader in THC-infused vaping oils, announced in May. Lusardi said the company aimed to comply with that request by the end of September.

At least one company has received second requests on multiple acquisitions.

Harvest Health & Recreation confirmed that it received a second request for its acquisition of Verano Holdings, a deal valued at more than $800 million. The DOJ has also requested information on Harvest’s acquisitions of cannabis distributor Falcon International and vertically integrated cannabis retailer CannaPharmacy.

The company said it's working with the DOJ but gave no details on when it expects to comply with the requests for information.

Other mergers confirmed to have received second requests this year are Cresco Labs-Origin House, Cannex Capital-4Front and MedMen-PharmaCann.

— Understanding the industry —

The regularity of the second requests indicates the DOJ is as interested in learning about industry-wide competition as it is about identifying overlaps in specific deals.

Several executives at cannabis companies working to gain DOJ approval, including Curaleaf and Harvest, have described what they see as an effort by regulators to “understand” the industry.

Only a handful of cannabis deals have successfully navigated the HSR process since late 2018.

The $650 million acquisition by iAnthus Capital of MPX Bioceutical didn't attract additional DOJ scrutiny, and closed in February. It’s notable that iAnthus and MPX filed their HSR paperwork in November, getting ahead of a surge in cannabis merger deals announced at the start of 2019.

Green Thumb Industries’ acquisition of Las Vegas-based Integral Associates, owner of the Essence retail outlet chain, also completed the HSR process without incident and closed on June 5 as expected.

4Front and Cannex received a second request on April 18, but subsequently withdrew their HSR filing as stock market declines reduced the value of their deal, which eventually closed July 31.

In all cases, the Justice Department has the right to review and challenge the deals at a future date.

— GrassRoots next —

Curaleaf says its acquisition of GrassRoots will create the largest cannabis company in the US, with pro-forma revenue of $256 million, 68 operational dispensaries, 46 growing and processing facilities and licenses to open 131 dispensaries across 19 states.

Despite the scale, the companies have made a point of noting that there are few geographic overlaps between the two companies. GrassRoots primarily operates in the US Midwest while Curaleaf is focused on the Northeast.

Yet geographic, and possibly commercial, overlaps do exist. Curaleaf and GrassRoots both own coveted dispensary licenses in Arizona, Ohio and Maryland, according to company disclosures. Tightly controlled by state governments, licenses to sell, process or grow cannabis are key industry commodities, ownership of which will determine competition across the market.

The GrassRoots acquisition will almost certainly be examined in conjunction with Curaleaf’s pending acquisition of Select. Indeed, Curaleaf’s financial analysis of the GrassRoots deal highlights possible synergies between all three companies.

GrassRoots and Select both hold dispensary licenses in Michigan and all three companies hold assets in Nevada, including licenses, brands and greenhouses.

Given that the Select deal has already received a second request, it's hard to imagine how the GrassRoots deal could proceed without additional scrutiny.