Concurrent with the release of its fourth-quarter results on Wednesday, Cresco Labs (CRLBF -3.33%) made a monster announcement: It has struck a deal to acquiring fellow marijuana company Columbia Care (CCHWF 1.43%).
According to the two companies, by combining in the deal they are creating the largest multi-state operator (MSO) in the U.S. So this is quite a big piece of news in the pot industry. Here's a rundown of its particulars.
A mighty big bag of weed
When companies about to merge use the term "largest," we should always take it with a degree of skepticism. Cresco and Columbia, which published a joint press release on their arrangement, said that together they will form this country's No. 1 MSO in terms of pro forma revenue (over $1.4 billion combined in the fourth quarter of last year).
Image source: Getty Images.
Whether or not that actually makes the fused entity the true top of the U.S. pot heap, the deal is one of the biggest in the brief history of the marijuana industry. All told, Cresco and Columbia estimate its total enterprise value at roughly $2 billion.
The acquisition will take the form of a share swap, in which Columbia stockholders will be given 0.5579 of a Cresco subordinate voting share for each Columbia share they possess. The two companies say that this represents a premium of around 16% based on the closing stock prices of both companies as of Tuesday, March 22.
After the swap is completed, current Columbia shareholders will hold roughly 35% of the combined company, which will presumably retain the Cresco Labs name.
The boards of directors of both companies have unanimously approved the acquisition. It also must be approved by Columbia shareholders in a vote with at least a two-thirds majority. It is subject to approval from the relevant regulatory authorities. Both companies expect the transaction to close in the fourth quarter of this year.
Cannabis compatibility
"This acquisition brings together two of the leading operators in the industry, pairing a leading footprint with proven operational, brand and competitive excellence," Cresco CEO Charles Bachtell said in a statement. "The combination is highly complementary and provides unmatched scale, depth, diversification and long-term growth."
While I wouldn't quite use the description "unmatched," the bulked-up Cresco 2.0. will certainly be a pot industry powerhouse, and a tough competitor.
With Columbia's assets in its portfolio, Cresco will operate more than 130 dispensaries in 17 states, plus the District of Columbia. In four of those states, either Cresco or Columbia has the top market share. This big buy will also strengthen Cresco's presence in the highly promising New York market, and bring it stores in another populous nearby state about to launch recreational weed sales: New Jersey.
As for products, the two companies say Cresco already holds the No. 1 market position in marijuana flower, concentrates, and vapes. So it's now well poised to extend that lead.
I feel that the two companies have obvious synergies, and if effected well, the absorption of Columbia into Cresco should be very beneficial. Investors are more wary, though, and traded the acquirer down by almost 8% on Wednesday (interestingly, they also pushed Columbia stock southward by nearly 2%).
This might have had more to do with those fourth-quarter Cresco results, which showed yet another in a string of bottom-line losses for the company. It also could derive from that lofty (for the pot industry) $2 billion enterprise value figure. I don't think the quarter was that bad, though, and we should bear in mind that the deal is being executed entirely in stock, conserving precious capital.
At the end of the day, I think this is a good deal for Cresco that'll make an already-strong operator that much more of a force on the U.S. marijuana scene.
