(This developing story was updated at 1:08 p.m. ET.)
Major multistate marijuana operators Cresco Labs and Columbia Care on Wednesday said they have agreed to combine in a blockbuster deal worth roughly $2 billion, with Chicago-based Cresco set to acquire New York-headquartered Columbia.
The proposed all-stock merger is one of the largest in the cannabis industry to date and would produce one of the biggest MSOs in the nation.
The combined footprint of the two companies would include more than 130 cannabis retail locations across 17 states and the District of Columbia, reaching about 55% of the U.S. population, the companies said in a news release.
Those states include “today’s most influential markets and those with the biggest tailwinds for growth and adult-use upside,” the companies said, specifically citing New York, New Jersey, Virginia, Pennsylvania, Ohio, Maryland and Florida.
The companies said the combined business would have pro-forma annual revenue “in excess of $100 million in 8 different states by 2023” and total revenue of more than $1.4 billion before any divestitures, making Cresco the largest annual revenue generator in the cannabis industry.
The acquisition is poised to create “a clear industry leader,” Owen Bennett, a cannabis equity analyst for New York-based investment bank Jefferies Group, wrote in a Wednesday morning note to clients.
Cresco’s “main shortcomings were the fact a few important states were missing and its margin profile,” Bennett wrote, whereas Columbia Care has “an excellent geographic footprint, but lacked any scale overlaying this.”
“The combined company will have scale across most key states, industry-leading brands and wholesale across these states, and much improved margin profile.”
‘Main drivers of value’
Cresco and Columbia Care also said they would achieve synergies by boosting retail productivity, cutting “redundant operational and capital expenses” and “(deleveraging) the organization through the proceeds from the sale of redundant licenses and assets in high-value markets.”
On a Wednesday conference call, Cresco CEO Charlie Bachtell said those synergies would be “definitely one of the main drivers of value that you’ll see from this combination.”
The planned marriage will also involve some divestitures, with Bachtell saying that it was likely some of the combined company’s New York assets would be sold.
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“I think both organizations are going to proceed (with) doing what we need to do to make sure that those facilities are functional and operational in time to meet the adult-use market,” Bachtell said.
“But, keep in mind, everything that we do in furtherance of that, we think also creates value for the divestiture.”
Asset sales might also be required in Illinois, Florida, Ohio, Maryland and Massachusetts, Andrew Partheniou, an equity analyst with St. Louis-based investment banking firm Stifel GMP, wrote in a Wednesday note.
Combined entity to carry Cresco name
The combined company will continue to be called Cresco Labs, with Bachtell at the helm as CEO.
Columbia CEO Nicholas Vita will become a board member, with the possibility of a “potential management role” in the future, according to a Cresco spokesperson.
Cresco has roughly 3,500 employees, according to a Wednesday earnings release.
Columbia listed 1,781 employees as of March 1, 2021, according to a regulatory filing.
Under the proposed acquisition announced Wednesday, Columbia shareholders would receive 0.5579 of a Cresco subordinate voting share for each Columbia share held, a premium of roughly 16% over the companies’ Tuesday closing share prices.
Columbia shareholders would end up with roughly 35% of Cresco.
The acquisition, which is subject to court, regulatory and shareholder approvals, is expected to close in the fourth quarter of this year.
Cresco has successfully closed a number of acquisitions in recent years, including Ohio medical marijuana dispensary chain Verdant Creations, Florida MMJ company Bluma Wellness, Massachusetts cannabis operator Cultivate and Pennsylvania cannabis companies Cure Pennsylvania and Laurel Harvest Labs.
However, several other proposed Cresco acquisitions have been terminated, including deals to acquire:
‘Considerable risk to close’
Stifel GMP’s Partheniou observed that the Cresco-Columbia deal “may have considerable risk to close given the significant footprint overlap and Cresco Labs having a spotty track record with three terminated acquisitions.”
If the deal falls through, a termination fee of $65 million would be due to Cresco under certain, unspecified circumstances, according to the joint news release.
The release did not specify whether Cresco would owe Columbia a termination fee.
The $2 billion deal is set to be one of the largest M&A transactions in U.S. cannabis history.
Florida-based MSO Trulieve announced a $2.1 billion deal to acquire Arizona-headquartered Harvest Health & Recreation in May 2021, a deal that closed in October.
Other recent major U.S. cannabis transactions include Verano Holdings’ $413 million deal to acquire Goodness Growth Holdings and TerrAscend’s $545 million deal to buy Gage Growth, which closed this month.
Cresco also reported earnings on Wednesday for the fourth quarter and year ended Dec. 31, 2021.
Annual revenue was $821.7 million, including fourth-quarter revenue of $217.8 million.
Cresco posted an $11.9 million net loss for the quarter, compared with a net loss of $41.2 million in the same quarter of 2020.
The company’s annual net loss was $296.8 million, compared with a $92.8 million net loss the year before.
Most of that annual net loss was attributable to a $291 million third-quarter impairment charge related to the company changing its California strategy.
Cresco had nearly $224 million in cash and equivalents on hand at the end of 2021.
Solomon Israel can be reached at firstname.lastname@example.org.