Chicago-based multistate cannabis operator Cresco Labs said it is ending its agreement to buy Florida’s VidaCann, becoming the latest U.S. marijuana M&A deal to unravel and highlighting the steps companies are taking to navigate a rocky business environment.
Cresco’s decision, in particular, sheds light on how marijuana companies are scrambling to save money and refocus efforts on their core markets amid a shortage of outside funding and falling cannabis stock prices.
The vertically integrated company noted in a news release it’s saving additional cash through the sale of two cultivation and processing facilities in Michigan and Ohio for nearly $40 million.
According to industry watchers, Cresco’s announcement signals three main takeaways:
- Transactions predominantly focused on equity are more likely to close.
- Companies will increasingly focus on their immediate core markets in light of challenging financial conditions.
- Cash savings are key as companies try to carve out profitability quicker.
In what was largely an all-cash deal worth about $120 million, Cresco had agreed in March to acquire vertically integrated VidaCann.
VidaCann operates 13 dispensaries in Florida as well as a 70,000-square-foot cultivation and processing facility.
In the news release, Cresco said it’s saving about $158 million to add to its balance sheet from both the termination of the deal and approximately $38 million from the separate sale of the two cultivation and processing facilities it will lease back.
Cash no longer king
The move supports the idea that all-stock transactions in the cannabis industry are more likely to survive – if amended under the different current trading conditions – than deals that are largely announced based more on cash.
“With highly volatile share prices, share-swap equity deals have a greater chance of closing since both the buyer and seller share in the upside or downside in the share prices,” said Mike Regan, equity analyst at MJBizDaily’s Investor Intelligence.
“In contrast, deals with a large cash component lock in the values at the deal announcement. It is smarter to redeploy that cash than to raise cash via shares issued at a 40% lower price than the original March 18 deal announcement.”
In recent weeks, Cresco amended the terms of its all-stock deal with California marijuana distributor Origin House and Curaleaf has changed the terms of its planned all-stock purchase of the Select brands of Cura Partners. Both deals are seen as likely to close.
An exception to this is MedMen’s cancellation of its planned purchase of PharmaCann, which also was an all-stock deal.
Focusing on core markets
Cresco, which releases quarterly results after the market close Tuesday, said it will continue to monitor the Florida market for future opportunities but would focus for now on more core markets in California, Illinois, Nevada and Pennsylvania.
In September, the company agreed to buy Tryke, a vertically integrated cannabis company that is active in Arizona and Nevada. That deal has a $55 million cash component in an overall transaction worth approximately $282.5 million.
Cresco said it is selling its two facilities in Michigan and Ohio to real estate investment trust (REIT) Innovative Industrial Properties for approximately $38 million.
The combined 166,500-square-foot facilities will be leased back and continue to operate under the Cresco name.
“In combination with the decision to terminate the Florida acquisition, the company has effectively strengthened the balance sheet by $158 million in a very nondilutive manner, which we view positively,” equity analyst Russell Stanley at Toronto-based Beacon Securities wrote in a research note.
Cresco trades on the Canadian Securities Exchange as CL.
Nick Thomas can be reached at [email protected]
For a more in-depth review of the Cresco and VidaCann deal failure, the impact of deal structure as well as sale-leasebacks, check out this story in our premium subscription service, Investor Intelligence.