With several blockbuster cannabis M&A deals already guiding the conversation about 2019 transactions, Cresco Labs came along and announced an April 1 move that set a new standard for market consolidation this year. The Chicago-based company entered into a definitive agreement to acquire all issued and outstanding shares of Canadian branding and distribution company Origin House (otherwise known as CannaRoyalty Corp) for C$1.1 billion. Origin House delivers more than 50 brands to more than 500 California cannabis dispensaries.
The move was described as the largest public company acquisition in the U.S. cannabis sector to date. Cresco Labs, founded in 2013, will now have a footprint that stretches across 11 U.S. states, 51 retail stores and 1.38 million square feet (all pending the regulatory approval of this and other transactions).
Greenspoon Marder partner Sander Zagzebski says that Cresco’s big move is another sign that the market consolidation trends observed in 2018 are naturally carrying over—and with greater impact—into 2019.
“We’re anticipating a significant increase in M&A activity, and this is very predictable,” Zagzebski says. “Cresco’s got a more nationwide footprint, and Origin is California. California is the largest legal weed market on the planet. … Right now, you have a lot of operators, a lot of scale and a ‘land grab,’ if you will, among the leading public companies to build scale, increase scale, increase capacity and hope to emerge as the leader—or one of the leaders—when the dust settles in the next few years.”
Cresco had already laid claim to 592,000 square feet of cultivation space in California through an indoor cultivation network partnership signed in July 2018. The Origin House acquisition will add 92,00 square feet of cultivation space by the time the deal closes, which is expected in the second quarter of this year.
When that earlier California deal was made last summer, Cresco had only a three-state footprint in the U.S. The increase to 11 states is a testament to the sheer velocity of M&A activity in the cannabis industry.
“There’s a huge consolidation wave—I would say it’s coming, but it’s already here,” Zagzebski says. “‘Land grab’ isn’t meant to be a snub. These deals seem to make very strategic sense for both parties.”
More broadly speaking, the move speaks to trends that have seen sharp increases in cannabis company valuation—and deep-pocketed interest from outside the sector. As cannabis companies begin to trade on public markets (Cresco began trading on the Canadian Securities Exchange Dec. 3 under the ticker symbol “CL”), the influx of capital is not going unnoticed by larger firms keeping tabs on the nascent cannabis space.
“Everybody seems to understand and accept that there are some very, very large players waiting on the sidelines to get into the game,” Zagzebski says. “They’re forced to be on the sidelines because the world they live in doesn’t allow them to make investments or acquisitions in U.S.-based cannabis companies yet. Federal illegality is an absolute bar.”
These players include major banks and private equity funds with the scale and liquidity to compete easily and aggressively once the U.S. legalizes a cannabis industry—in whatever shape that process takes.
As industry observers expect the M&A trends to pick up speed this year, so too will companies begin to restructure in a way that favors these multi-state operations and agile management teams.
As Cresco Labs CEO Charlie Bachtell said in a public statement following the deal: “This significantly accelerates our efforts to build the first national house of brands with broad and deep positions in the largest cannabis markets in the country. Cresco will have industry-leading brand development and distribution capabilities, which we believe will result in significant value creation for consumers and our shareholders alike as the market for medical-use and regulated adult-use cannabis continues to grow at a rapid pace.”
And that growth shows no signs of slowing down, what with more U.S. markets expected to come online this year (thought that remains to be seen, as state legislators continue to debate the merits of legalization in large states like New York, New Jersey and Pennsylvania). While the legal side of cannabis is growing at its own pace, companies like Cresco and others are setting the market’s terms.
“All of that sorting of winners and losers is starting to happen," Zagzebski says, "and I think big deals are part of the natural order of events as the larger operators—the people that can scale—are figuring out how to scale more aggressively on a timeline that … is rather compressed. I think legalization is—maybe not next year, but people are putting very large wagers that the feds are going to get out of people’s way sometime pretty soon.”