Cresco Labs (CSE:CL,OTCQX:CRLBF) will upgrade its California market presence thanks to an acquisition deal for Origin House (CSE:OH,OTCQX:ORHOF).

On Monday (April 1), Cresco Labs confirmed an all-share deal worth approximately C$1.1 billion for Origin House, representing a price of C$12.38 per share. Origin closed on Friday (March 29) at C$12.05.


Thanks to this acquisition, Cresco is gaining a more mature entry to the California market based on the established distribution channels created by Origin House.

 

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“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,” Charlie Bachtell, CEO of Cresco Labs, said in a press release.

Origin House’s distribution network allows it to provide products from over 50 cannabis brands to over 500 dispensaries in the state, Cresco Labs said in its announcement.

Marc Lustig, chairman and CEO of Origin House, said the acquisition deal will “supercharge” the growth of the company and will give an entry to additional states.

“Cresco shares Origin House’s resolute focus on the customer as the catalyst for all brand and business development efforts,” he said.

The executive confirmed this is not the first opportunity Origin House has had at being acquired.

Origin House shareholders will receive 0.8428 of a Cresco Labs share per every Origin House common share held, according to an investor presentation. This implies a 25.9 percent premium.

During a conference call on Tuesday (April 2), Bachtell said this acquisition represents a perfect complement to Cresco Labs.

“Origin House is one of the only cannabis players that figured this out early and took a pure play approach to the market as a base for national and international expansion,” the executive said.

The executive team of Cresco Labs explained how the challenges of the California market test the quality of marijuana brands.

“If you’re successful in California, you’re going to be successful on a larger national and international scale,” Bachtell said.

 

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Joe Caltabiano, president and co-founder of the multi-state operator (MSO), said once the company’s expansion in Florida clears and it receives its license in Michigan, it will have a presence in 11 states, with a dominant market share in California, Pennsylvania, Ohio and Illinois.

The executive also confirmed that the MSO plans to retain the Canadian assets of Origin House and will expand on plans to bring US brands to the 180 Smoke line of shops in Canada at a logical time. Origin House completed its acquisition of the retailer in February.

Portfolio advisor praises deal for Cresco Labs

Charles Taerk, president and CEO of Faircourt Asset Management, told the Investing News Network that he is in favor of the deal, saying it will create the “most dominant” MSO in California.

“They’re really focusing on the higher end, higher margin part of the business, which is the extracts and the product formulation, the edibles and distribution,” Taerk said.

The executive said MSOs have been turning to the California market for the latest in business expansions, with recent acquisitions from Green Thumb Industries (CSE:GTII,OTCQX:GTBIF) and Harvest Health & Recreation (CSE:HARV,OTCQX:HRVSF) confirming his theory.

The California market has not seen “major footholds” from one MSO directly, according to Taerk. These acquisitions represent the start of the creation of a market share in the space.

“[MSOs] have all said the same thing, ‘If we went to California, we would not use our own brands; we would be moving in with a strategic partner who knows California,’” he said.

Taerk also acts as the sub-advisor to the Ninepoint Alternative Health Fund. The executive said Origin House has long held a top 10 holding position for the fund.

Stock market reacts to new acquisition deal

Shares of Cresco Labs and Origin House rose following the call with investors on Tuesday. Cresco Labs closed at a price of C$16.22 per share, representing a 3.64 increase for the day, while Origin House increased in value by 2.58 percent to C$11.95.

“I think Canadian investors, by and large, misunderstand what companies like Origin House and others are doing, because they don’t put a lot of money or capital into cultivation,” Taerk said.

Russell Stanley, analyst with Beacon Securities, initiated coverage of Cresco last Friday by slapping the stock with a buy rating. The analyst indicated a one year price target of C$22 to shareholders.

 

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In his note, he praised the company for its reputation and said Cresco’s focus “on branded products and distribution entrenches it firmly in the most lucrative and defensible points of the cannabis supply chain,” according to a Globe and Mail report.

In March, Matt Bottomley, analyst with Canaccord Genuity (TSX:CF,OTC Pink:CCORF), gave Origin House a C$12 price target and indicated a buy position on the stock.

The Cresco deal has the full backing of Origin House’s executive team and board of directors, which is indicative of its preference; in January, a grouping of approximately 26 percent of its investors agreed to vote on acquisitions based only on what the executive team decided.

At the time, Lustig said this was done to protect the company from “opportunistic bids.”

“For Origin House, the time is now, and the partner is Cresco,” Lusting said during the conference call.

In March, Origin House secured a unique relationship within the burgeoning retail sector in the Canadian marijuana space.

The company confirmed that its subsidiary, Trichome Financial, extended a revolving credit facility and term loan of C$2 million to the operators of one of the stores debuting with the launch of the Ontario retail market.

Trichome has grown its connections and business interests to such an extent that the company is planning a spin off and a separate public listing.

“With the core of the company’s infrastructure in place and the ability to leverage Origin House’s significant US market knowledge, [Trichome] believes that it is uniquely positioned to capitalize on credit market opportunities in the US market,” Trichome announced in February.

It remains unclear whether Trichome will continue its public listing pursuit with the Cresco Labs acquisition offer at hand. Representatives of the company did not return a request for comment.

This is an updated version of an article originally published by the Investing News Network on April 1, 2019.

Don’t forget to follow us @INN_Cannabis for real-time news updates!

Securities Disclosure: I, Bryan Mc Govern, hold no direct investment interest in any company mentioned in this article.

Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.

 

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