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Stay Away from Cresco Labs Stock Until the Smoke Clears

support@smarteranalyst.com (Ben Mahaney)

Cresco Labs (CRLBF) appeared on the way to acquire Origin House after it made a C$1.1 billion offer that was quickly approved of by a significant majority of Origin House shareholders.

As part of the process, businesses involved with mergers valued at over $90 million are required to contact the Federal Trade Commission and the Department of Justice via an HSR filing. Once it is filed, all participants in the deal have to wait for 30 days before closing the deal.

Usually there is little chance they are questioned, as less than four percent are hit with a Second Request, is when the DOJ asked the parties involved for more information. When these requests are sent, it is in reference to concerns over something related to anti-competitive impacts as a result of the transaction.

Consequently, with this deal there are three questions that must be answered. The most obvious is whether or not the deal will be allowed to go through. Second, if it does, what, if anything, will have to change in order to obtain approval. And third, what the new time frame will be to close the deal if it is allowed to go forward and be finalized.

The time frame will be extended to close the deal

No matter how this plays out, there is no way this deal is going to close anytime soon. Originally it was supposed to be completed in June 2019, but that is no longer in the cards.

Per the Second Request, there is a 30-day waiting period given to the companies to give time to respond to the request and the desired associated material.

After the period, the normal waiting period to comply with the request is usually about three months. If that's how it plays out in this case, and assuming the deal goes forward, it would mean it wouldn't close until some time in October 2019.

The downside of this is once there is a Second Request, approximately 70 percent of the time the deal is either not allowed to go forward, or requirement put in place that would have to be met before the deal is allowed to be completed.

If Cresco Labs and Origin House don't like or don't agree with what the DOJ determined or requires, they could go to court over it. If that happened, it would be much longer before the deal could be closed.

Major negative catalyst

More than anything else, the short-term negative impact on the companies will be the cloud hanging over the deal, along with the uncertainty as to what it exactly is the DOJ is looking at concerning anti-competitive elements of the deal, as it views it.

The market doesn't like a lack of visibility in these types of deals. Until there is more clarity, the effect on the two companies will be to put some downward pressure on the share price of both stocks, with the most likely negative impact to be on Origin House.

Even so, even after the announced bid for Origin House was announced and before it was known there would be a Second Request from the DOJ, Cresco Labs wasn't receiving a lot of love from investors, having pulled back by about $3.00 per share after a brief boost from the news.

It would be surprising if it doesn't drop further because of the uncertainty surrounding the deal, including the inability of the market to value the company until that is made clear.

Conclusion

If this deal doesn't go through, or the terms of the deal have to be changed in order to receive approval from the DOJ, Cresco Labs will take a hit, but Origin House will almost certainly take a bigger one.

As it stands today and based upon how Second Requests have worked in the past for companies receiving them, the odds aren't in the favor of this deal standing as it was originally hammered out between the two companies. There is also the possibility it will be halted permanently.

Again, the major problem in the short term is nobody knows what it is exactly that made the DOJ make a Second Request. Until that is revealed, investors' hands are somewhat tied because of not know which way this will play out.

For that reason it's going to be difficult to accurately price these companies and add or take away from a position. They fact they are now have a better entry point will mean little if the worst-case scenario plays out. Both companies would take a big hit if the deal is not allowed to continue.

On the other hand, if it does go through they're going to rebound nicely, and reward shareholders in both companies with nice gains.

This will be a cat-and-mouse game until the DOJ reveals its concerns, and if applicable, how both companies respond to any changes required to move the deal forward.

In a market sector that already has risk, there are better plays to be had that include a better risk/reward ratio. I would stay in the companies if I already had a position, but I would be careful not to add to my position until the smoke clears.

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