Curaleaf (CAN:CURA / US:CURLF), the largest U.S. marijuana company by market cap, announced a major acquisition today.
Curaleaf announced it would be acquiring Cura Partners for C$1.27 billion (about US$950 million).
Cura Partners is producer and distributor the Select brand of marijuana THC and CBD extract oils.
It’s one of the largest wholesale marijuana product suppliers in California, Arizona, Oregon and Nevada with distribution across 900 retailers.
The deal got a lot of attention because of it’s near $1 billion size.
But the real question marijuana investors should be asking themselves is “Why?” because real rationale for the deal points to where the largest and most experienced marijuana companies are seeing the industry headed.
Now, in the official announcement, there is typical merger-based pablum.
There is actual mention of the “vertical integration” of two large marijuana companies and the expected “efficiencies” of the combined companies to come.
That’s well and good in a mature industry where companies try to squeeze a few extra percentage points of margin.
In a new, growth industry like marijuana, there are much bigger factors at play here.
The Seed Investor expect the key to long-term success in the marijuana industry will be growing market share and geographic expansion.
The companies which can achieve those two most successfully while the industry is still in its relative infancy will be the big winners in the marijuana boom.
Curaleaf’s acquisition is targeted at achieving both of those things in one deal.
Curaleaf is predominately and eastern U.S. marijuana company. The majority of its distribution network and retail outlets are Florida, Maryland, New York, Pennsylvania, and other East coast states.
This acquisition is a major expansion in the other direction to the western U.S. Curaleaf gets instant exposure to the western U.S. which is farther down the legalization path while maintaining its large position in the eastern U.S.
So that’s the geographic part.
The market share part comes from Cura Partners’ leadership in the extracts segment of the marijuana industry.
Extracts are the hottest place in the market right now. And, as we reviewed in How To Invest In The Coming Vape Explosion, they will eventually grow to be the largest part of the legal marijuana industry.
After the deal is complete, Curaleaf will have advanced its market share while expanding into key markets.
That’s why the vertical integration, efficiencies, synergies, and other buzzwords you’ll see around this deal are nonsense at this time.
Rest assured the keys to success in marijuana industry will be growing market share and expanding geographically.
We’ll worry about margins and earnings in the early 2020s.
Investors looking to ride the long-term growth of the legal marijuana industry would do best to focus on the companies which can grow their market share with new products and increased sales and expanding into new markets.