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3 Things You Need to Know About the Biggest Public US Cannabis Acquisition Ever

Keith Speights, The Motley Fool

Chicago-based Cresco Labs (NASDAQOTH: CRLBF) announced on Monday morning that it's acquiring Origin House (NASDAQOTH: ORHOF). Cresco stated that it will be the biggest acquisition of a public U.S. cannabis company ever.

With such a major deal, you might think that Origin House shareholders would be on cloud nine. However, that wasn't the case. Origin House shares dropped 5% in early trading on Monday. Why wasn't there more excitement over the acquisition? Here are three things you need to know about this transaction that promises to shake up the U.S. cannabis industry. 

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Image source: Getty Images.

1. Terms of less-than-endearment

Probably the main reason Origin House shareholders weren't overly enthusiastic about the acquisition is the price tag. The deal values Origin House shares at 12.68 in Canadian dollars, or around $9.50. That's only a 5% premium over Origin House's closing price on Friday, March 29, 2019. 

Origin House shareholders won't get any cash, either. Cresco Labs plans to acquire all outstanding shares of Origin House, with each Origin House shareholder receiving 0.8428 shares of Cresco Labs for each Origin House share owned. 

Cresco Labs has been a solid winner, jumping 35% in 2018 and up 68% so far this year. But Origin House has been even hotter, soaring 59% last year and 85% year to date in 2019. It was even the No. 2 best-performing marijuana stock on the market in March. Some Origin House investors might think that they're getting ownership in a Corvette when they owned a stake in a Ferrari.

2. The case for why the deal makes sense

Size matters. If you're looking for the main reason why a combination of Cresco Labs and Origin House makes sense, that's it. 

Cresco Labs is already one of the largest cannabis operators in the U.S. Cresco claims a 28% market share in Illinois and a 30% market share in Pennsylvania. It's awaiting licensure in Michigan and closing of an acquisition in Florida. Once these transactions are finalized, Cresco will have operations in 11 states, including 15 production facilities, 21 operational retail dispensaries, and licenses for another 30 retail dispensaries. 

Origin House is the leading distributor of cannabis products in California, which has the largest legal marijuana market in the world. It has an expanding lineup of its own cannabis brands. The company is also poised to move into the Canadian recreational marijuana market in a major way with its acquisition of vape retailer 180 Smoke.

Cresco Labs thinks that its acquisition of Origin House will create a "North American cannabis powerhouse." CEO Charlie Bachtell said that the deal will give Cresco "the largest and most strategic distribution footprint of any cannabis company in the United States." 

Origin House CEO Marc Lustig also sees a big advantage with the combination of the two companies. He stated, "By partnering with one of the largest and most innovative U.S. multi-state operators in existence today, Origin House will supercharge its growth and be in a position to offer its brand partners access to 10 additional states, with licenses and supporting infrastructure already in place."

3. What it means for investors going forward

The deal isn't done just yet. Both companies' boards of directors have unanimously approved the transaction. Cresco Labs' shareholders don't have to vote on the acquisition. However, a meeting will likely be held in June for Origin House shareholders to vote. Two-thirds of shares must be voted in favor of the deal for it to close, in addition to the normal regulatory approvals.

Assuming the transaction does successfully close, Origin House shareholders will own around 20% of Cresco Labs. The big question then will be: Now what? It could be smart for investors to hold on for the ride. 

Cresco Labs projects pro forma combined revenue with Origin House in its fold this year of $383 million. By 2021, the company expects revenue of $1.04 billion and EBITDA of $317 million. And that's probably just the beginning.

The U.S. marijuana market is expected to grow dramatically over the next several years, with some projecting a market of $22 billion by 2022. There's also a multibillion-dollar hemp opportunity thanks to the legalization of hemp in the U.S. in December 2018. In February, Cresco Labs launched a subsidiary to target the hemp cannabidiol (CBD) market.

If the acquisition of Origin House by Cresco Labs goes through, Cresco appears likely to become the sixth-largest cannabis operator by market cap. Although there seems to be some degree of disappointment for Origin House investors, the combined entity could be just what the two companies hope it will be -- a North American cannabis powerhouse.

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Keith Speights has no position in any of the stocks mentioned. The Motley Fool recommends Origin House. The Motley Fool has a disclosure policy.