Cresco Labs’ buyout of Origin House was filled with promise

One such cannabis stock merger that began with a ton of promise, but seemed to limp to the finish line, was that of vertically integrated multistate operator Cresco Labs (OTC:CRLBF) and Origin House (OTC:ORHOF).

On April 1, 2019, Cresco Labs shocked Wall Street by announcing an all-stock acquisition of Origin House, a company that primarily earned its living as a cannabis distributor in California. The deal, which would result in Origin House shareholders netting 0.8428 shares of Cresco for every share of Origin House they owned, was the largest U.S. pot stock acquisition announced at the time. Based on Cresco’s respective share price at the announcement of the deal, the price tag looked to be worth around $840 million.

As noted, what made Cresco’s purchase of Origin House so unique is that Cresco wasn’t looking to simply buy retail licenses, grow farms, and processing sites. Rather, it found that the best way to grow sales and infiltrate the largest marijuana market in the world (California) was to acquire one of the very few companies to hold a cannabis distribution license in the Golden State. Buying Origin House allows Cresco Labs to get its products into approximately 575 California dispensaries, representing about 65% of all legal retail locations in the state.

Additionally, this buyout makes Cresco Labs privy to Origin’s relatively consistent distribution revenue tied to its more than one dozen third-party brands. Not to mention, Cresco gains access to Origin House’s 92,000-square-foot indoor cultivation facility in California, which will further aid in the company’s efforts to entrench its footprint in the Golden State’s cannabis market.

It was a great deal on paper that quickly lost its pizzazz as time wore on.

A green highway sign that reads, Welcome to California, with a white cannabis leaf in the upper-right corner.

IMAGE SOURCE: GETTY IMAGES.

This now-closed deal has been a disappointment all around

This past week, on Wednesday, Jan. 8, Cresco announced that its deal to acquire Origin House was finally complete, more than nine months after it was initially announced. However, the terms of the now-complete merger aren’t the same as they were when first divulged in April.

In mid-November, Cresco and Origin House amended their original agreement, which the duo attributed to dynamic market conditions. Instead of Origin House shareholders receiving 0.8428 shares of Cresco Labs for every Origin House share they owned, they’d instead receive 0.7031 shares of Cresco Labs. This means the 66.5 million shares of Cresco used to acquire Origin House this past week (along with a substantial decline in Cresco’s stock) more than halved the value of the deal when first announced.

The amendment also required Origin House to issue more than 9.7 million shares of its common stock to raise $30.5 million. This request was the real eye-opener that not everything was hunky dory with the impending combination. Without access to traditional forms of financing, U.S., pot stocks have genuinely struggled to fund their operations. Cresco, among other capital-raising means, has executed sale-leaseback agreements with Innovative Industrial Properties for two Illinois properties, and required Origin House to raise capital by issuing its common stock.

Remember, even though the combination means an immediate boost in sales for Cresco and quick access to Californian dispensaries, it also involves taking on Origin House’s expenses and, for the time being, its operating losses. Origin House lost $47.2 million Canadian from operations through the first nine months of 2019, representing a 139% widening in operating losses from the same period in 2018.

Source: https://www.fool.com/investing/2020/01/12/a-major-cannabis-stock-merger-is-now-complete-but.aspx