Take the Cresco Labs deal, PI Financial tells Origin House shareholders

PI Financial analyst Jason Zandberg likes the newly announced agreement for Cresco Labs (Cresco Labs Stock Quote, Chart CSE:CL) to acquire Origin House (Origin House Stock Quote, Chart CSE:OH) and is changing his rating from “Buy” to “Tender” for OH.

The largest acquisition yet in the US cannabis space, the $1.1 billion deal announced on Monday would see Origin House shareholders receiving 0.8428 Cresco shares for every OH share, representing C$12.68 per share, a 26 per cent premium based on the 30-day VWAP of OH shares ending March 29.

Marc Lustig, Chairman and CEO of Origin House stated in a press release, “From an Origin House perspective, this transaction is directly aligned with our strategy to build a leading portfolio of cannabis brands in California and to rapidly and accretively take those brands to the rest of the US market, as well as the Canadian market.”

The $823-million deal would surpass earlier acquisitions such as MedMen’s $682 million purchase of PharmaCann and iAnthus’ $625 million purchase of MPX Bioceutical. (All figures in US dollars unless noted otherwise.)

In an update to clients Monday, Zandberg says the combined entity will have operations in 11 states including Arizona, California, Florida, Illinois, Massachusetts, Maryland, Michigan, Nevada, New York, Ohio, and Pennsylvania with more than 1.5 million sq. ft. of cultivation and 51 retail dispensaries.

“The transaction will establish the US cannabis industry’s first national ‘house of brands’ with a growing multi-state footprint,” says Zandberg. “Origin House’s vast distribution network will accelerate Cresco Labs’ entrance into California, providing access to over 500 dispensaries (approximately 60 per cent of the market penetration).”

Zandberg is leaving his forecasts for OH unchanged at revenue and EBITDA for fiscal 2018 of $25.0 million and negative $1.6 million, respectively, revenue and EBITDA for fiscal 2019 of $25.0 million and $5.3 million, respectively, and revenue and EBITDA for fiscal 2020 of $145.4 million and $32.9 million, respectively. The analyst’s previous target price for OH was C$8.00.