A billion dollars for a Portland marijuana company.

It’s an astonishing figure. Last month’s deal for Cura Cannabis was the biggest acquisition in the history of legalized marijuana in the United States. It’s a sign of just how quickly the market is emerging. And that’s just the beginning of the story.

Curaleaf, the Massachusetts company buying Cura’s recreational marijuana business, is backed by a Russian billionaire whose fortune helped fuel its rise. Investors value the startup at nearly $4 billion and project its value to rise by 20 percent when the all-stock deal for Cura closes.

That would make Curaleaf more valuable than all but three public companies in Oregon, were it based here, despite reporting less than $80 million in revenue last year along with a $56 million loss.

The marijuana market is an industry in flux, caught between its underground roots and a new era of enormous commercial potential. It’s consolidating rapidly as early players like Cura and Curaleaf, both with highly unorthodox corporate histories, race to lock in an early advantage.

Like other new industries, though, the cannabis business is coping with enormous uncertainty and rapid change. Recreational marijuana remains illegal under federal law and it’s not clear when, or how, that might change.

“If I had a billion dollars it’s not where I would put the money,” said Andrew Freedman, who helped guide the legalization process in Colorado and now runs a government consulting firm in San Francisco. “I do think there’s a lot of risk.”

Oregon’s surviving independents, meanwhile, are casting a wary eye on the advent of Big Cannabis. They’re wondering if they have a place in the future of a market they helped create.

“You have to have a product that’s really differentiated,” said Mason Walker, CEO of East Fork Cultivars, which operates a farm in Southern Oregon and a branch office in Portland. He said independents have an opportunity to stand out from commodity cannabis, but they have to invest in creating something distinctive.

“It’s going to be really tough for the folks who have chosen to stay independent.”

‘Like Russia in the ‘90s’

In the weeks since Curaleaf unveiled its Portland deal, the value of the all-stock transaction has declined by more than 15 percent, down $160 million from its $1.1 billion price tag the day of the announcement. Other cannabis stocks have fallen, too, amid uncertainty about the future of federal regulation and a slew of quarterly financial results that were slightly below market forecasts.

The astronomical valuations for Curaleaf and other big cannabis companies reflect two assumptions: that the market will grow dramatically and will benefit the first movers.

No money changes hands in the transaction – when it closes, Cura’s owners get millions of shares of Curaleaf stock.

To cash in, both companies are making a tremendous bet -- not just on the growth potential of legal marijuana, but also on the abilities of companies like Curaleaf to capitalize on that rise in an increasingly competitive market.

Counting a customer's money at a Curaleaf dispensary in New Jersey. NJ Advance Media for NJ.com

It’s not a gamble everyone wants to take. Conventional sources of funding, like U.S. investment banks and established consumer products companies, want no part of marijuana.

That’s partly because recreational marijuana remains illegal under federal law, which adds risk and makes it hard or impossible to use banks, credit cards and other conventional business tools to operate.

And though growing numbers of people welcome legal marijuana, it still carries a cultural stigma among some segments of the population – an association many established brands don’t want. At least not yet.

“It is at the curious point where large amounts of capital are hugely helpful and a big advantage, but traditional sources of capital aren’t really available right now,” said Freedman, whose firm advises state and local governments on the cannabis legalization process.

That’s opened the door to some unconventional players.

Boris Jordan is Curaleaf’s executive chairman and controlling shareholder. Nearly three decades ago, he was among the American investment bankers who stormed into Russia to help privatize its state-owned enterprises amid the tumult that followed the collapse of the Soviet Union.

Boris Jordan in Moscow in 2001 on the day the state-run gas giant Gazprom ousted the board of directors of Russia's only independent television network, NTV, and named Jordan general director. He held the position for less than two years. He's now Curaleaf's executive chairman.AP

Backing Jordan is Andrei Blokh, a billionaire Russian dairy tycoon. Blokh holds U.S. citizenship but lives in Moscow. He owns 28% of Curaleaf’s stock; Jordan controls 31%.

Of Curaleaf’s five board members, three – including Jordan – bring experience in Russian finance to their foray in the new frontier of legal marijuana in the U.S. As states move one by one to legalize recreational marijuana, Jordan sees a similar opportunity to the one presented by the breakup of Soviet industries.

“Itʼs just like Russia in the 1990s,” Jordan told Bloomberg in 2017. “Weʼre talking about an industry in its infancy that needs to be built up from scratch, legislation and all.”

An inevitable consolidation

Marijuana legalization is taking place piecemeal, with each state setting its own rules and licensing standards. Medical marijuana is legal in 33 states, while recreational marijuana is legal in 10 – including Oregon, Washington and California. Newly passed legislation in Illinois will make that the 11th state on Jan. 1.

Jurisdictions generally limit the number of licenses to grow and sell marijuana. So big cannabis companies are racing to get bigger, buying each other in a race to capture regional markets.

“I believe what’s happening is people are happy taking losses in the short term with this stuff in order to have entrenched licenses,” Freedman said. “The bet they’re making is that on the ground, they’re going to be able to shoulder anybody else out, at least geographically.”

There are other advantages, too. Marijuana is fundamentally an agricultural commodity and will face the same competitive pressures other farm products do. Successful operators profit either by distinguishing their brand or products or by integrating their operations.

In cannabis that means controlling everything from the cultivation to the storefronts stocking the finished product. And that’s fueling the surge in business combinations.

"Consolidation isn't just happening in Oregon, you're seeing it across the country and globally," said David Alport, founder and CEO at Bridge City Collective in Portland. “It’s an inevitability, just with the capital structure that our economy is based on. I’m not surprised to see it.”

Curaleaf has 43 dispensaries, a dozen grow sites and 11 processing facilities – all concentrated on the East Coast. It also sells a line of cannabidiol, CBD, which doesn’t include THC, the agent that produces the high associated with smoking pot.

Medical cannabis growing at a Curaleaf site in New Jersey.

Cura’s Select brand is a leader in the western U.S., with farms and wholesale operations and one of the best-known names in recreational cannabis. Its products are for sale in more than 900 retailers, primarily in Oregon, California, Nevada and Arizona.

After the deal, Curaleaf says it will sell a line of health-oriented cannabis products under its own name while adopting Cura’s Select brand for recreational marijuana. Cura is positioning Select as a party product.

A new full-page ad in Rolling Stone calls one Select product “your favorite rapper’s favorite rapper’s favorite cannabis.” At the raucous Coachella music festival in California in April, the company staffed afterparties with young women in leotards, stockings and tight white T-shirts emblazoned with the Select logo.

Above: Select Oil’s promotional efforts at afterparties at the Coachella music festival in April.

A challenging history

Though Curaleaf is the buyer, privately held Cura is actually the bigger company – with $100 million in recreational marijuana sales last year. It’s not clear why Cura decided to sell out instead of making its own acquisitions but the Portland company’s difficult heritage may be part of the story.

Shayne Kniss, founder of the company that became Cura, began serving a three-year sentence in federal prison this spring after pleading guilty to taking money from Oregon retirees to invest in marijuana startups.

Close to 60 victims remain out $1 million from the scam. They have no claim to the Cura millions because of an early legal settlement that extinguished any rights to the cannabis business.

Longtime Cura CEO Nitin Khanna is a former Portland technology executive. He stepped aside at Cura in May 2018 after members of the Oregon cannabis community highlighted rape allegations against him stemming from a 2012 incident. Khanna has always denied the claims; he settled a civil suit with his accuser two years later without admitting wrongdoing.

Nikin Khanna, Cura's executive chairman, in 2017.

Though Khanna was no longer CEO, he quietly retained a previously undisclosed leadership role as Cura’s executive chairman. Documents associated with Cura’s pending sale show that Khanna approached Curaleaf within weeks of relinquishing the CEO post, looking to sell the Portland business.

Curaleaf declined to address Cura’s troubled history but it was already well acquainted with the Portland company before it announced last month’s acquisition. An investment firm Jordan controlled had taken a 12% stake in Cura when Khanna was at the helm.

Documents associated with the deal indicate Jordan recused himself from the takeover discussions as the deal came together over nearly a year.

Curaleaf timeline • 2010: PalliaTech, later known as Curaleaf, founded as medical device company for delivering metered doses of cannabis medicine. • July 2016: private placement of 1,520,431 shares at $15.785 apiece, proceeds of $24 million. • August 2018: Changes name from PalliaTech to Curaleaf; issues $85 million in bonds. • October 2018: Combines with Lead Ventures, a small Canadian mineral exploration company, and assumes lead’s stock listing. Private placement on Canadian Securities Exchange raises $400 million. • May 2019: Buys Portland-based Cura Cannabis for nearly $950 million in Curaleaf stock.

Curaleaf says the combined company would have had $75 million in revenue last quarter – putting it on track for sales of $300 million or more per year. It raised $400 million in investment capital last year and acquired a listing on a Canadian stock exchange by purchasing a small minerals exploration company, then assuming its stock listing.

It’s a complex arrangement but it’s not uncommon in the cannabis industry, which exists in a kind of legal purgatory. U.S. stock markets don’t permit marijuana companies to list on their exchanges.

Curaleaf’s stock jumped in the hours after it announced its deal for Cura last month, pushing the value of the all-stock transaction over $1 billion. Shares have sagged in the weeks afterwards, though, amid continued uncertainty about federal regulation and the deal is now worth just under $800 million.

That’s a small fortune in either case. On paper, anyway.

Curaleaf remains a relatively modest business, albeit a fast growing one. It has announced several acquisitions this year, mostly individual dispensaries or small operations that expand its geographic footprint in Ohio, Arizona and elsewhere. Of the $400 million it raised last fall, the Massachusetts company had $172 million left at the end of March.

On a call with investment analysts early this year, Jordan said Curaleaf has the “cash on hand to execute our organic growth plan and to continue to expand with no near term need to raise additional funds.”

NJCI A customer holds a package of cannabis flower at a Curaleaf dispensary in New Jersey. NJ Advance Media for NJ.com

The small community of investment analysts who follow the legal marijuana market note Curaleaf’s value is bolstered by the billionaires who control the company and have pledged not to sell their shares before next fall. But the analysts also say the companies represent an opportunity to capitalize on potentially explosive growth for investors who are willing to take a gamble.

In March, before the deal for Cura, Canaccord Genuity analyst Matt Bottomley rated Curaleaf a “speculative buy” a category for stocks that “bear significantly higher risk that typically cannot be valued by normal fundamental criteria.”

Bottomley hasn’t rated Curaleaf since – his firm is a financial adviser to Cura. But he issued an upbeat outlook on the broader industry last week due to expanding production and proliferating dispensaries.

“We believe many operators are setting up for an attractive back half of 2019,” Bottomley wrote.

The landscape in Oregon

In Oregon, marijuana is rapidly becoming one of the state’s major industries. Total sales likely topped $500 million last year and state economists forecast Oregon revenue will top $1 billion by 2025.

The explosive growth brings a lot of opportunity but also a great deal of pain. Amid a well-documented glut of supply, retail prices have fallen by half since 2015.

Consolidation is transforming Oregon’s homespun marijuana industry, squeezing the market and heaping pressure on the independent growers and retailers who helped create it.

By and large, though, they’re sanguine about the emergence of corporate cannabis.

“I do think consolidation brings a ton of legitimacy to this industry,” said Kym Gatto, co-founder of Allay Medicinals, a Portland company that sells lotions infused with CBD to treat irritated skin and sore muscles.

Fewer than a dozen companies already own about half of Oregon’s more than 600 dispensaries. The biggest players include Nectar, Groundworks, C21 Investments, Mr. Nice Guy, La Mota and Chalice Farms.

Alport, the CEO of Bridge City Collective, said he sees a future where “big box cannabis” exists alongside classically Oregon artisan alternatives. He said local cannabis might someday look like beer in Oregon, with craft brews existing alongside the national brands.

“I would love to see more of a craft brewery experience,” Alport said. “I think it’s only a matter of time.”

Correction: This article originally said Andrei Blokh owns the Chelsea F.C. soccer team. The team belongs to Blokh’s childhood friend, Roman Abramovich.

-- Mike Rogoway | twitter: @rogoway | 503-294-7699