We’ve seen a lot of wheeling and dealing in Canada when it comes to cannabis companies, but U.S. companies are getting in on the action as well. Cresco Labs (CSE:CL)(OTCQX:CRLBF) announced in a release today that it would be purchasing Origin House (CSE:OH)(OTCQX:ORHOF) in an all-stock deal valued at CAD $1.1 billion. Under the terms of the deal, shareholders of Origin House will receive 0.8428 shares of Cresco. As of Friday’s close, Cresco’s shares were at $15.05 and at the above multiple would equate to a price of $12.68.
Origin House, previously known as CannaRoyalty Corp, has a big presence in California, which is a key part of why Cresco made the move to buy the company.
[The acquisition] establishes Cresco Labs as the leading multi-state operator with one of the largest distribution platforms in California, which is projected to be a $7.7 billion cannabis market in 2022 by Arcview Market Research/BDS Analytics. Having a similar priority on consumers and consumer brands with the expertise of executives from the largest wine and liquor distribution company in the United States, the team at Origin House has established the premier cannabis distribution company in the largest cannabis market in the world. It’s an incredible platform for Cresco in California and the distribution infrastructure will provide a valuable framework to leverage as we scale our platforms in other states. Congratulations to Marc and the team at Origin House – through strategic M&A and purposeful investments, they’ve built something very special.
– Charlie Bachtell, CEO of Cresco Labs
Gateway to California
Acquiring Origin House gives Cresco an easy way to grow its brand in California, one of the hottest markets for cannabis in the U.S. And with federal laws making it difficult for cannabis companies to grow organically, using an acquisition to facilitate growth becomes a logical option. Origin House distributes more than 130 branded products in California, from over 50 different brands.
In its most recent quarter, Origin House saw sales hit over CAD$6.6 million, a big increase from just CAD$774,000 a year ago and it was also an 89% improvement from the prior quarter. And with a lot of cash on its books, over CAD$75 million as of Q3, it’s likely a big bonus for Cresco, especially in a cash-strapped industry.
Origin House has been doing well well enough on its own, with the share price tripling over the past year. And so it’s no surprise that Cresco had to offer a bit of a premium to investors. With a market cap of a little under $800 million, it’s around a 40% premium that Cresco placed on the shares of Origin House. However, The Company certainly expects a lot from the acquisition and it could more than pay off in the end.
More to come from Cresco?
What’s interesting from that statement from Cresco’s CEO is that he mentions scaling in other States. Although Cresco has a presence in multiple States in the U.S., I suspect The Company may not be done just yet. With 10 U.S. States having legalized marijuana for recreational use and big markets like New Jersey and New York looking to be next, there’s tremendous growth potential for Cresco. It is clearly looking at the numbers and seeing the sales potential in other States and while this transaction might be the biggest one thus far, I wouldn’t be surprised if this is just the start.