Cresco Labs to Create First MSO with a “House of Brands”

Cresco Labs (CSE:CL), one of the U.S cannabis stocks listed in Canada and a multi-state-operator (MSO), has agreed to buy Origin House (CSE:OH) for C$1.1 billion in an all-stock deal

SmallCapPower | April 3, 2019: Cresco Labs Inc. (CSE:CL), one of the U.S cannabis stocks listed in Canada, Monday announced that it has agreed to acquire Origin House (CSE:OH), in an all-stock transaction valued at approximately $1.1B. Each Origin House shareholders will receive 0.8428 shares of Cresco Labs for each Origin House share held, or the equivalent of $12.68 per Origin House share based on Cresco’s closing price of $15.05 on Friday, March 29, 2019, which implies a 5.2% premium to Origin House based on OH’s closing price of $12.05 on March 29.

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Once the deal is complete, Origin House shareholders will own ~20% of the pro forma company. Both Cresco Labs and Origin House boards unanimously support the transaction, with ~15%-20% of shareholders entering into support agreements, stating they will hold their shares for nine months after closing of the transaction. However, one OH shareholder Jerome Hass, portfolio manager at Lightwater Partners, told BNN Bloomberg recently that he is underwhelmed by the deal and is planning on voting against it. The transaction requires the approval of two-thirds of the votes cast by shareholders of Origin House at a special meeting expected to be held in June 2019. If all requirements are met, the transaction is expected to be completed by the end of June 2019.

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The combination of Cresco Labs and Origin House is expected to accelerate Cresco Labs’ entrance into the California market, which has the potential to be the largest cannabis market in the world. The combined entity will become the first national “house of brands” with a multi-state footprint in some of the largest U.S. states, such as California, Pennsylvania, and Illinois. In addition, it is expected to create one of the leading North American cannabis company by geographic footprint and one of the largest cannabis brand distributors in the country. Origin House currently distributes over 50+ brands to more than 500 Californian dispensaries, representing 60% market penetration. The combined entity is also expected to become one of the largest vertically-integrated multi-state operators (MSOs) in the U.S. As a result of the vertical integration, the combined companies’ margins are expected to increase by ~15%-20% based on lower input costs of $2/gram of wholesale flower, which can be supplied by Cresco to Origin House to support its brands, such as Chong’s Choice, Cheech’s Private Stash, and Soul Sugar Kitchen.

Cresco Labs CEO and Co-Founder Charlie Bachtell stated, “The acquisition of Origin House is another example of our focused and disciplined approach to creating a meaningful presence in key cannabis markets through excellence in brand development and distribution. It establishes Cresco Labs as the leading multi-state operator (MSO) with one of the largest distribution platforms in California, which is projected to be a $7.7 billion cannabis market in 2022 by 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.”

As of the close on Tuesday, April 2, 2019, Cresco’s and Origin House’s shares are up 3.6% and 2.6%, respectively. Cresco and Origin House have market caps of ~$3.3B and ~$763M, respectively.

Disclosure: Neither the author nor his family own shares in any of the companies mentioned above.

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