Cresco Labs Inc. CEO Charlie Bachtell said his company’s $2 billion all-stock purchase of Columbia Care Inc. announced on Wednesday originated as a logical step for both acquisitive companies to bulk up quickly.
The tie-up came together “at a high level and quickly” as a logical combination between two consolidators in the industry that agreed that bigger is better nowadays in the cannabis space, Bachtell said.
“For both companies it was a recognition that this was the right deal for both of us to do to secure industry leadership,” he said.
agreed to pay 0.5579 shares of its stock for each share of Columbia Care
The deal values Columbia Care at about a 16% premium over its closing price of $3.12 a share on Tuesday.
After the deal was announced, shares of Cresco Labs fell 6%, while Columbia Care stock rose 1.3%.
The companies said the deal will create the largest multi-state operator in the U.S.
Jefferies analyst Owen Bennett reiterated a buy rating on Cresco which he counts as a top pick. Cresco’s expected 2022 sales of $1.8 billion puts it ahead of other big U.S. multi-state cannabis operators Trulieve
and Green Thumb Industries
“We see the combination creating a clear industry leader,” Bennett said. “The combined company will have scale across most key states, industry leading brands and wholesale across these states, and much improved margin profile.”
Prior to Wednesday’s trades, shares of Cresco Labs were down 2% so far in 2022, compared to a drop of 19% by the AdvisorShares Pure U.S. Cannabis ETF
Columbia Care stock was up 9.1% so far this year.
The combined company will have a market capitalization of roughly $4.5 billion, and 133 dispensaries, including 50 from Cresco Labs and 83 from Columbia Care.
Cresco Labs is already active in cannabis markets in many of the most populated U.S. states. Columbia Care has top market share in Colorado and a presence in Arizona and California, as well as inroad into the “states of tomorrow” such as New Jersey and Virginia that are in the process of legalizing cannabis for adult use.
Prior to the deal, Columbia Care had not publicly disclosed any plans to sell itself or to consider strategic alternatives. Bachtell described the genesis of the deal as more of a one-on-one process rather than a traditional auction with multiple bidders.
“We thought the timing was right, the opportunity was there, and we see a ton of synergies and mutual visions,” Bachtell said. “It fits really, really well.”
Cresco Labs is bulking up in anticipation of federal legalization in the U.S. which Bachtell predicts will happen in the future.
Prior to this deal, Cresco Labs had made 22 acquisitions with a combined value of $1.98 billion, according to FactSet data. Columbia Care has made seven acquisitions with a total value of $678 million.
Columbia Care shareholders will hold approximately 35% of the pro forma Cresco Labs when the deal closes as expected in the fourth quarter.
Separately, Cresco said its fourth-quarter loss narrowed to $11.9 million from a loss of $41.2 million in the year-ago quarter. The company did not provide a figure for loss-per-share. Fourth-quarter revenue climbed 34% to $218 million.
Analysts expected Cresco Labs to earn 3 cents a share on revenue of $234.5 million, according to FactSet estimates.
“As we all saw, there was a slowing of market growth in the fourth quarter and we were not immune to this,” CEO Bachtell said in a statement. “We competed very well, gaining or maintaining share in seven of our 10 states.”