A U.S. cannabis company is paying top dollar to acquire an Ottawa-based firm with deep roots in the lucrative California market.
Chicago-based Cresco Labs (CSE:CL) announced Monday it will acquire Ottawa’s Origin House (CSE:OH) in an all-stock deal worth $1.1 billion, representing a 26 per cent premium on the local firm’s 30-day volume-weighted average share price. In a news release, the two firms called the proposed transaction the largest public company acquisition to-date in the U.S. cannabis industry.
Shares of Cresco are up roughly four per cent since markets opened on Monday, while Origin House’s share price has remained fairly steady at around $11.90.
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The acquisition, which remains subject to regulatory and shareholder approval, is expected to close by the end of June. If the deal is approved, Origin House shareholders would own roughly 20 per cent of the combined entity.
Complementary distribution networks
The two companies exist in a similar space in the burgeoning U.S. cannabis market, operating as licensed growers, creating and distributing branded products for dispensaries across the country and running their own retail outlets. The opportunity for the to-be-merged company comes from the firms’ established distribution networks, which open up new channels for both companies.
Origin House, which went public on Canadian stock markets in late 2016, operates numerous cannabis cultivators and distributors in the sizeable California market. One of the firm’s strengths, according to CEO Marc Lustig, is its portfolio of 50-plus cannabis brands, which it delivers to more than 500 dispensaries in the west coast state.
That distribution network is key to Origin House’s value. In addition to selling its own homegrown and branded products, the company acts as a middleman between California’s growers and retailers. Distribution is a critical part of the cannabis supply chain in California, where the legal weed market is expected to hit $7.7 billion by 2020, according to Arcview Market Research/BDS Analytics.
While Origin House’s reach in California has driven the company’s growth to date, Lustig says the time has come for the firm to take its brands nationwide.
“We were right at the point where we were exploring how we were going to expand out of California and into some other states,” he says.
Enter Cresco Labs. While Origin’s distribution play has been largely focused on California, Cresco has taken a multi-state approach. CEO Charlie Bachtell says the company will soon have operations in 11 states pending the close of a few transactions, and had next been gearing up to take a run at California.
The synergy between the two companies’ distribution models quickly became apparent: Cresco could bring its portfolio of national products into the already-mature California market, and Origin’s west coast brands could immediately tap into nearly a dozen new states through Cresco’s network.
“You see how the puzzle pieces fit together.”
“You see how the puzzle pieces fit together,” Bachtell says.
Different opportunities north of the border
Bachtell will remain CEO of the combined company, while Lustig will join the board of directors and fill a yet-undefined role, likely leaning on his background in capital markets. Bachtell says Cresco had leaned on Lustig’s expertise in this area even before talks of a merger were on the table.
“Marc has always been a friend, and an invaluable resource when it comes to capital markets and Bay Street,” he says.
Origin House’s Ottawa operations are limited to roughly a dozen employees in finance and administration. Lustig says the company has grown more in Toronto and, of course, California than at its capital headquarters.
Origin House burst on the cannabis scene a few years ago as CannaRoyalty, looking to acquire promising pot firms in an uncertain industry with a patchwork of laws and regulations scaring off institutional investors but opening opportunities in the grey areas.
CannaRoyalty sold itself as a vehicle for investors to legally get exposure to the burgeoning cannabis market in Canada as well as the United States, where it remains federally illegal to invest directly in pot firms.
“Let’s call it a landmark that you kind of drive by and take a picture of yourself at, and then you just keep moving.”
While Canadian vape retailer 180 Smoke is among Origin House’s portfolio companies, Lustig says Canada’s market doesn’t offer the same opportunity for distributors as the U.S. In Canada, provinces act as the wholesalers, while licensed producers and retailers are largely restricted to those distinct roles. For example, growers in Ontario are restricted to a single retail outlet at a production facility, while some provinces don’t allow producers to run any retail operations.
Though he’s undoubtedly proud of growing a unique cannabis company into a billion-dollar acquisition, Lustig doesn’t see the deal as an exit. Rather, he says it’s a milestone he can appreciate before moving ahead with his plans to – alongside the team at Cresco – build the biggest cannabis company in the world.
“Let’s call it a landmark that you kind of drive by and take a picture of yourself at, and then you just keep moving,” he says.
