Rapid Reaction: Does Cresco’s acquisition of Origin House help make it a CPG target?

Cresco Labs CEO Charlie Bachtell told Investor Intelligence last month that the company’s growth strategy would be focused on a combination of organic and transactional activity.

Today’s news that the Chicago-based multistate cannabis operator (MSO) will acquire Canada’s Origin House – a major player in brands and distribution – in a deal worth roughly $823 million places the focus squarely on the transactional side of such a strategy.

The move is consistent with Cresco’s focus on brands and distribution, Steve Ottaway, managing director of Investment Banking at Toronto-based GMP Securities, told Investor Intelligence.

“Cresco was always a hybrid, and this is furtherance of that,” he said.

It could even make the MSO an eventual takeover target for an established consumer packaged goods (CPG) company, as this sweet spot is often a critical part of those companies’ strategies as well.

“Every major cannabis player will be a target one day,” Ottaway said. “We are not there yet.”

Cresco’s focus on branded products and distribution places the company in what equity analyst Russell Stanley of Beacon Securities has called “the most lucrative and defensible points of the cannabis supply chain.”

The company’s further expansion into California – where Origin is a major player, delivering more than 50 brands into 500-plus dispensaries – is another major attraction of the deal.

“(The) main motivator for the deal was the clear path into the large/ever-expanding California cannabis market,” Paul Penney, managing director at Arizona-based Northland Securities, wrote in an investor note.

Bachtell previously said that California was still in its infancy as a cannabis market.

“California is a new market for us in 2019, and all that growth is yet to materialize,” he said during an Investor Intelligence webcast in March. “California is at inning two.”

Cresco is hopeful its latest acquisition will attract more institutional investor money to its coffers and allow the company to expand further through additional M&A activity.

“With respect to the capital markets impact,” Cresco President and co-founder Joe Caltabiano said in a news release today, “with the equity issued through this transaction, we expect to have substantially more shares in our float, which we believe will provide ample liquidity for larger institutional investors looking to deploy capital into the cannabis space.”