Cresco Labs, Origin House revamp cannabis merger as value falls more than 50% and close delayed

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Cresco Labs, a Chicago-based multistate cannabis operator, and Origin House are overhauling the terms of their merger announced earlier this year, as falling cannabis stock prices and other factors slashed the value of the transaction in half to approximately $400 million.

Because of the revised terms, the transaction also will now not close until approximately mid-January, two months later than initially expected.

While the terms of the renegotiated deal had a small effect on the overall value – analysts estimate about a 7% decline from the transaction restructuring versus almost 50% just on falling stock prices alone – it is a significant change, because the deal is now more likely to close.

The change in the transaction details, which also include an Origin House equity financing of roughly $30 million, comes at a time when many M&A cannabis deals are either being renegotiated or canceled altogether as stock prices decline amid slower funding and increased investor focus on profitability.

When the deal was first announced April 1, Cresco’s planned all-stock purchase of Canada-based Origin House, which has a significant cannabis distribution business in California, was valued at roughly $823 million.

As of market close Nov. 12, before any amendments to the transaction had been made, the deal was worth approximately $446 million.

After the amendments, the value of the deal was about $416 million and is now, at current stock prices, worth about $386 million. That represents a 53% decline from the April 1 value.

“The equity market environment has changed meaningfully since we first announced this proposed transaction,” Marc Lustig, chair and CEO of Origin House said in a news release.

“While this has presented challenges, it will also present opportunities for companies with quality assets and brands to quickly gain market share and build long-term shareholder value.”

Cresco, Origin House had hinted at revisions

Both Cresco and Origin House had indicated the need to restructure their deal last month when the companies disclosed they were seeking “mutually agreeable” terms on which to close the transaction after receiving the all-clear from the U.S. Department of Justice on antitrust grounds.

Analysts viewed the amended transaction positively for both parties, because it provides greater certainty regarding the eventual closing of the deal at a cheaper price for Cresco but with terms that will benefit Origin House in the long run.

“An all-equity structure spreads the pain of 50% stock declines more evenly between acquirer and target than deals with a fixed-cash component that favors the target,” said Mike Regan, equity analyst at Marijuana Business Daily‘s Investor Intelligence.

“Though the Origin House shareholders will receive 17% fewer Cresco shares, the deal seems to have a greater chance of closing now, and the pro forma entity will be better capitalized.”

The amended terms are actually favorable for both companies because they also result in a premium for Origin House shareholders based on closing prices Nov. 12, said Robert Fagan, an equity analyst at Toronto-based GNP Securities.

“We believe OH shareholders could remain satisfied with the new terms, while CL would be set to acquire OH at a slightly improved valuation, representing a win-win proposition for all parties, in our view,” he wrote in a research note.

Cresco and Origin House trade on the Canadian Securities Exchange (CSE) as CL and OH, respectively.

Amended deal reflects growing trend

Such deal restructuring comes even as the cloud of antitrust scrutiny is significantly lifted. Cresco’s amended transaction is just the latest in a line of such changes.

In October, Los Angeles-based MedMen canceled its planned acquisition of Chicago’s PharmaCann.

More recently, Massachusetts-based Curaleaf said it was changing the terms of its planned purchase of the Select cannabis brand of Cura Partners, slashing the value of that deal by about 70%.

Harvest Health & Recreation, a Phoenix-based multistate cannabis operator, said Nov. 5 that it and acquisition target Verano had entered a 30-day waiting period after completing antitrust requirements.

At the time, Harvest did not make any reference to a need to change the terms of the planned all-stock deal which, when announced March 11, was valued at $850 million.

That value was based on a Harvest share price of 8.79 Canadian dollars ($6.59).

As of Nov. 13, Harvest, which lists on the CSE as HARV, was trading at CA$3.60, implying a decline in deal value of roughly 60%.