Consolidation is inevitable in the marijuana industry. Since the industry is illicit in some parts of the U.S. and pot can't cross state lines, the easiest way for cannabis companies to expand is through mergers and acquisitions. The latest deal to shake up the industry involves Cresco Labs (CRLBF 2.49%), which announced last week that it would be acquiring fellow multi-state operator Columbia Care (CCHWF 1.12%).
The acquisition will make the combined entity the new leader in cannabis (at least until the next deal takes place). Cresco Labs will certainly get bigger from the deal, but does that make it a better buy today?
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All-stock deal means dilution for current shareholders
Despite the fanfare surrounding the large $2 billion acquisition of Columbia Care, shares of Cresco Labs are down on the news. A big part of the reason is that the deal will be funded entirely through shares. That means dilution and some near-term pain for investors as the stock inevitably goes lower.
But the question is how long the stock stays down. That's because the good news for investors is that in the long term, there are many positives to take from this deal.
What investors should like about this acquisition
There are several items that Cresco Labs' management highlighted in its recent earnings call that should please investors, including the following:
- The deal will add eight new markets for Cresco Labs, including New Jersey, which will commence adult-use sales later this year. The company's footprint now spans 17 states plus Washington D.C., which puts it in more than 70% of the addressable cannabis market.
- Together, the companies are leading in market share in some of the top markets in the country -- Illinois, Pennsylvania, Colorado, and Virginia.
- By 2023, the combined entity expects to be generating more than $100 million in annual revenue from each of eight different markets.
- Outside of Florida (where Trulieve Cannabis dominates), the company will have the #1 retail footprint in the country. Cresco Labs and Columbia Care have more than 130 retail stores combined -- Trulieve has more than 160 dispensaries nationwide, but fewer than 50 are outside Florida.
- Both companies generate positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). In 2021, Columbia Care's adjusted EBITDA margin was 12.6% of revenue. Cresco Labs' margin is a bit higher at 23.6%.
However, investors will need to wait as it won't be until the fourth quarter of this year when these two companies expect the transaction to close.
Should investors buy Cresco Labs today?
Cresco Labs has gone from being one of the top marijuana companies in the industry to potentially the overall leader. This will significantly expand the growth horizons for the business and help it expand its brands across the country. It was encouraging that Cresco Labs was opportunistic in waiting for valuations in the industry to fall as heavily as they did before making a bid on a top MSO like Columbia Care (both stocks are down about 50% in the past year, in line with the Horizons Marijuana Life Sciences ETF which has fallen around the same amount). And so, as bad as the dilution may seem now, it could have been worse if Cresco Labs had made the deal months earlier.
Prior to the deal, I believed both of these stocks looked like promising buys, so combining makes Cresco Labs look like an even more attractive investment today. With shares of the company less than a dollar away from its 52-week low, now can be an optimal time for investors to add the stock to their portfolios. There could be more of a decline in the price in the short term, but there are many more reasons to buy Cresco Labs today than there are to sell it.
