Cresco Labs Inc. is seeking to penetrate the market in multiple U.S. states with its acquisition of yet another cannabis producer and distributor, Origin House, in a C$1.1 billion deal.
Chicago-based Cresco Labs, which manufactures medical cannabis products in the U.S., called the transaction the largest acquisition of a public company in the U.S. cannabis sector in announcing the deal April 1.
Cresco Labs CEO Charles Bachtell told analysts on a conference call a day later that the acquisition will allow the company's brands to enter over 725 dispensaries across the U.S., giving it the largest and most strategic distribution footprint of any cannabis company in the country. The transaction will boost the combined company to become the second-largest U.S. cannabis operator and the sixth-largest North American cannabis operator by market capitalization.
The acquisition of Ottawa-based Origin House will allow Cresco Labs to penetrate the California cannabis market, the largest regulated cannabis market in the world.
Bachtell said Cresco Labs was working to build its stand-alone presence in California's distribution network, but the market has proven difficult to break into because of the size and regulatory framework. Origin House, meanwhile, already delivers to over 500 dispensaries in California.
The combined companies will have operations in 11 states, with the dominant market share in California, Pennsylvania, Ohio and Illinois.
Cannabis M&A spree
In the past year, both Origin House and Cresco Labs have been on a buying spree to expand in the cannabis sector.
Earlier in March, Cresco Labs announced plans to buy Jacksonville, Fla.-based medical cannabis company VidaCann Ltd. for about US$120 million. The company also moved to acquire shares of cannabis cultivator Hope Heal and an affiliated real estate entity in the U.S. in December 2018.
Origin House, formerly known as CannaRoyalty Corp., acquired Toronto-based vape product retailer 180 Smoke LLC for C$25 million in February. The company also closed an acquisition of marijuana distributor RVR Distribution in October 2018. Acquisitions in 2017 included California-based Kaya Management Inc., the exclusive manufacturer and license holder of rights for the Bhang brand vaporizer products, and Alta Supply Inc., which distributes the vaporizer and chocolate products to third-party cannabis companies in California.
GMP Securities LP initiated analyst coverage of Cresco Labs just a day before the Origin House deal was announced. In a note dated March 28, the firm said Cresco Labs has simultaneously expanded organically and through acquisition, while not sacrificing growth to achieve profitability. The company maintains strong market share of about 25% to 30% in its existing markets and has established the second-largest production platform among all public multistate operators.
The analysts, however, noted that Cresco Labs has aggressive expansion plans in almost every state, which could mean a mismatch between revenues and expenses negatively impacting margins. The company also faces integration risks associated with pending acquisitions.
GMP added that despite state laws that have provided legal access to marijuana within their territories, cannabis remains a controlled substance in the U.S. Any strict enforcement of federal cannabis laws by federal authorities could harm Cresco Labs' business and expansion plans — as is the case for any company in the space.