The biggest cannabis merger yet is underway as Cresco Labs announced yesterday a $2 billion acquisition of Columbia Care with a stock swap that will provide Columbia Care shareholders with 35% of Cresco’s outstanding shares when the deal is complete.
Swallowing Columbia Care puts Cresco into “biggest cannabis company” territory, as it competes with Curaleaf for the mantle across numerous measurements. With the completed deal, Cresco would become the biggest by dispensaries and by revenue, giving it 130 dispensaries across 18 markets and $1.4 billion in annual pro-forma revenue. But if the deal does go through, Cresco will have to divest dispensaries in states with license caps: Illinois, Massachusetts, New York, and Ohio. Curaleaf has 128 dispensaries across 25 markets, and reported $1.2 billion in revenue for 2021.
Markets did not treat either Cresco or Columbia Care nicely following yesterday’s announcement, as the stocks both dropped on the Toronto Stock Exchange, with Cresco (CRLBF) dropping from $6.53 Tuesday to $6.02 at market close Wednesday, and Columbia (CCHWF) dropping from $3.12 Tuesday to $3.06 at close Wednesday. Cresco also announced Wednesday morning that it missed earnings projections for Q4 2021.
This is Cresco’s second major acquisition since halting two pre-Covid acquisition moves, a $282.5 million aborted purchase of Nevada’s Tryke in 2020, and 2019’s terminated purchase of Vidacann for $120 million in 2019. Since then, Cresco has purchased a number of smaller, privately held companies as well as Florida-based Bluma, for a stock deal of $213 million.
“They’ve tried to M&A in the past, so they must have high confidence they can close this,” said Alex Gastevich of V. Gastevich Investments, which was an early investor in Cresco. Gastevich also pointed out that markets have not reacted well since the announcement, despite Cresco’s relatively strong balance sheet.
“I think these companies have lowered their debt, improved cash flow and several have seen that scale is the next phase. They are able to do what they weren’t a few years ago,” he said.
The acquisition will significantly expand Cresco’s operations west of the Mississippi, adding new dispensaries in Missouri, Utah, Arizona, California, and making it the largest holder of dispensary licenses in Colorado. The purchase also gives Cresco a stronger position in the Florida medical market with 27 total dispensaries – a far third place behind Curaleaf’s 45 Florida dispensaries and Trulieve’s 111.
“It seems like with Columbia Care you have a platform of historically underperforming assets. In Cresco you have a team focused on operational acumen. You mix the two together with the cultivation and wholesale focus, it seems to make sense at a high level,” said investor Colin Ferrian from Poseidon Partners, which maintains a position in Cresco.
More than most cannabis companies, Cresco has been hiring from adjacent industries in an attempt to professionalize its staff, such as hiring Ty Gent from PepsiCo to be Chief Operating Officer and bringing in CPG and pharmaceutical company managers to run operations at the state level.
“There’s a lot of bashing of this deal going on. There’s integration risk, balance sheet risk, integration will be difficult,” said Ferrian, who cited a certain amount of griping by analysts during Wednesday’s earnings call. “But underreported is that Cresco has a distinct focus on operations and has for a while. If there’s a company with underperforming assets and can improve them, they are the top candidate. That has been understated by the critiques.”
One side effect of the merger is that Cresco would end up with two more dispensaries than allowed in Illinois, five more than allowed in Ohio, three more dispensaries and a cultivation site than allowed in Massachusetts, and would have two Registered Organization operations in New York, which includes a cultivation site, three medical dispensaries and the right to build five adult use dispensaries in the Empire State. In addition, at the deal’s completion Cresco will own three cultivation sites in Illinois, giving it a dominant position in the state’s production with a potential 630,000 square feet of licensed canopy for adult use.
All those licenses Cresco will have to unload could add up to hundreds of millions of cash, potentially giving the company a much better balance sheet down the line – and freeing up licenses for some other ambitious, growing cannabis companies.
“The question is who is best capitalized to take advantage of these new assets available,” said Ferrian. “The consus feedback is that [this acquisition] a sign of return to mergers and acquisition activity in the industry. Given what stock prices are, it’s hard to believe it’ll be a trend.”
But, with the first multi-billion dollar public company cannabis deal on the books, and now two major cannabis companies leading the industry, Curaleaf and Cresco, maybe other cannabis companies won’t have a choice but to get big.
“I think it’ll be interesting to see if [Green Thumb Industries] and Verano [Holdings] follow suit. They are better financial operators than Cresco or Curaleaf from a cash flow perspective,” said Gastevich. “Should they optimize for bottom line performance or get bigger?”