Mergers and acquisitions are pretty common in a growing industry. We have seen quite a lot of consolidation in the cannabis industry both in Canada and the U.S. With the boom in the U.S. state cannabis markets, the multi-state operators (MSOs) are expanding aggressively.
Recently, Illinois-based Cresco Labs (CRLBF 1.51%) reported outstanding quarterly results, wherein both revenue and earnings before interest, tax, depreciation, and amortization (EBITDA) grew at a double-digit rate. But more exciting was the mega-merger announcement made soon after the earnings.
Cresco unveiled its plans to acquire New York-based cannabis company Columbia Care (CCHWF -0.96%). Let's dig into the details to determine how this acquisition could be beneficial for Cresco Labs.
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What's in store for Cresco Labs?
On March 23, Cresco announced it will acquire all the issued and outstanding shares of Columbia Care, upon regulatory approvals. The deal, estimated at an enterprise value of $2 billion, could close by the fourth quarter of this year. Cresco expects to have a strategic national footprint holding "70% of the addressable cannabis market" by 2025 through this acquisition.
Cresco CEO Charles Bachtell said, "On a proforma basis, the combined company will be the largest cannabis company by revenue, the number one wholesaler of branded cannabis products, and the largest nationwide retail footprint outside of Florida."
Even though marijuana is not federally legal in the U.S., thanks to legal state markets, cannabis is one of the most promising sectors. Trulieve Cannabis has already been growing powerfully since acquiring Arizona-based Harvest Health last year, which helped it establish a foothold in Arizona, Pennsylvania, and Maryland.
It's a smart strategy for Cresco to acquire a rising cannabis company. The less competition the better when the U.S. eventually federally legalizes cannabis, breaking the whole American market wide open.
Becoming a force to be reckoned with
Right now, Cresco operates 50 stores nationwide. With Columbia's assets, Cresco will hold more than 130 dispensaries in 18 states. The company also aims to reduce unnecessary operational costs and capital expenses through cost synergies.
In 2021, Cresco posted 73% year-over-year (YOY) growth in total revenue, reaching $822 million. This drove a 219% YOY jump in EBITDA to $194 million. Cresco ended the year with $224 million of cash and cash equivalents. Meanwhile, Columbia Care recorded a 156% YOY jump in total revenue to $460 million for 2021 and adjusted EBITDA of $57 million, compared to a loss of $19 million in 2020.
This is a good deal for Cresco and will allow it to establish a more dominant U.S. presence in the expanding market.
Strike while the iron is hot
There couldn't be a more opportune time to invest in marijuana stocks with so many pot companies merging to position themselves for major changes in the U.S. market.
Smart investors know that growth stocks take time to manifest their full potential. Cresco might have to wait to reap the full benefits of this deal. Regardless, Cresco is becoming a cannabis powerhouse. It is not profitable yet, but with revenues and EBITDA rising every quarter, profitability is not far off.
CRLBF PS ratio (forward) data by YCharts. PS ratio = price-to-sales ratio.
Analysts see an upside of 150% for this pot stock in the next 12 months. Cresco is also very cheaply valued compared to peers, trading at a price-to-sales ratio of 1.6. This marijuana stock is also trading way under its 52-week high of $13.65, making it a buy-the-dip opportunity to hold for the long haul.
