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This U.S. Pot Stock Megamerger Clears a Hurdle but Hits a Snag

Sean Williams, The Motley Fool

For the past 18 months, marijuana stocks throughout North America have been laser-focused on one aspect of their maturation process: capacity expansion. With organic builds, partnerships, joint ventures, licensing agreements, and even acquisitions, growers big and small have been beefing up their capacity to meet what should be an influx of consumer demand.

But production isn't everything when it comes to the cannabis industry. Marijuana growers will need to tend to other aspects of the maturation process if they want to be successful. This involves building up brands, marketing, expanding into new territories, and possibly even consolidation in order to reduce expenditures and improve operating efficiency. This latter aspect -- consolidation -- has become a budding theme throughout the U.S. marijuana industry.

This past week, one highly anticipated U.S. pot stock megamerger cleared an important hurdle, albeit another one potentially cropped up in its place.

A green highway sign that reads, Welcome to California, with a white cannabis leaf in the upper-right corner of the sign.

Image source: Getty Images.

This was one of the largest U.S. pot deals ever announced

For those who may recall, back on April 1, multistate dispensary operator Cresco Labs (NASDAQOTH: CRLBF) announced that it would be purchasing Origin House (NASDAQOTH: ORHOF) in an all-stock transaction, which at the time was worth about $823 million. If the deal were to close, Origin House shareholders would receive 0.8428 subordinate voting shares of Cresco Labs' stock for each share of Origin House held. Based on Cresco's closing price this past Tuesday, June 11, of $9.89, this would work out to about $8.335 per share for Origin House. 

When announced, this looked to be an odd arrangement. Cresco Labs is a vertically integrated dispensary operator, meaning it controls its supply of weed from seed-to-sale in the states where it holds licenses. Meanwhile, Origin House is predominantly a cannabis distribution license holder in California. But a deeper dive unveiled the diamond in the rough.

The primary selling point of this deal is that it'll allow Cresco Labs, which has developed dozens of in-house branded stock keeping units (SKUs), to get its products into more than 500 licensed California dispensaries via distribution kingpin Origin House. Even without a substantial retail presence in California, Origin House becomes somewhat of a stepping stone for Cresco to penetrate about 60% of the Golden State's marijuana market. And, as a reminder, California projects as the largest marijuana market in the world by annual sales, with Wall Street forecasting $11 billion in yearly sales by 2030.

The impact of Origin House's niche position within California was on display just a few weeks ago when the company reported its first-quarter operating results. Sales rose to $11.2 million, up more than 1,600% year over year, and increased 41% from the sequential fourth quarter. 

Two businessmen in suits shaking hands, as if in agreement.

Image source: Getty Images.

One hurdle cleared, while another crops up

Yet, the big question since this deal was announced has been: Will Origin House shareholders vote for an all-stock deal? Last Tuesday, we got our answer.

As announced by both companies, Origin House shareholders who voted on the deal at the special meeting or via proxy overwhelmingly supported the combination. Nearly 99.4% of the outstanding common shares present were in favor of the combination, with a full 100% of the compressed shareholders voting in favor of the deal. Only two-thirds of common share votes, and a simple majority of compressed shares present, were necessary to approve the combination. 

With this hurdle now cleared, the expectation from investors had been that the Cresco-Origin House deal would quickly close. Unfortunately, it hasn't quite passed the sniff test with U.S. regulators.

The press release from Cresco and Origin House that announced the voting results also contained an update on the deal's U.S. antitrust review. On Monday, June 10, Origin House and Cresco received requests for additional information from the Justice Department Antitrust Division. This additional request extends the Hart-Scott-Rodino Antitrust Improvements Act waiting period by up to 30 days. Or, to put things in simpler terms, even if this deal does get the go-ahead from the Justice Department, it's likely going to close later than expected.

A judge's gavel next to a small handful of cannabis buds.

Image source: Getty Images.

The bigger concern here is the uncertainty created by the request for additional information. Although this request could be (and often is) completely benign, the inherent volatility of the cannabis industry, coupled with the wild imaginations of pot stock investors, could certainly lead to near-term volatility in the shares of both companies. 

However, Cresco Labs CEO Charlie Bachtell sees little to be worried about. Said Bachtell: "Consistent with other pending transactions in the cannabis industry, we have received a request for additional information from the Department of Justice regarding our acquisition of Origin House. We are confident that we will be able to submit all requested documentation to the Department of Justice as soon as possible and continue toward closing of the transaction."

My personal prognostication is that this merger will eventually go through. If that proves to be the case, what remains to be seen is whether or not Cresco Labs can achieve an ample return on its pricey investment by pushing heavily into the largest marijuana market in the world -- albeit one that, like Canada, is contending with supply chain issues at the moment. Only time will give us that answer.

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