Cresco Labs acquisition of Tryke gets thumbs up at Beacon

Cresco Labs (Cresco Labs Stock Quote, Chart, News CSE:CL) is a step closer to acquiring Nevada and Arizona-based Tryke Companies, writes Russell Stanley, analyst for Beacon Securities, who updated clients on Cresco in a report delivered on Wednesday.

Stanley has reiterated his “Buy” rating and C$24.00 target price for Cresco, saying that a second quarter 2020 closing date for Tryke is likely.

Chicago-based Cresco is a vertically-integrated multi-state operator with interests across 12 states. The company announced on Wednesday the expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act) with respect to its purchase of Tryke.

“This transaction represents the final major piece of our targeted footprint. Upon the closing of the Transaction, Cresco will have cultivation, processing, and retail assets in strategic and culturally significant legal states representing 71 per cent of the US addressable cannabis market. The Company’s focus on distribution and brand building will enable it to continue to capture solid market share in each of these key states as legal markets continue to develop,” said Charlie Bachtell, Cresco Labs CEO and co-founder, in a press release.

The Cresco Labs Tryke deal is worth $282.5-million…

Tryke has six retail locations in Nevada and Arizona, including the Reef Dispensary next to the Las Vegas Strip, and in addition has 17,000 lb per year of cultivation capacity and 1,320 lb of processing capacity. The company generated $70.4 million in revenue in 2018 and $24.6 million in EBITDA, making it “one of the highest grossing and most profitable private cannabis companies in the US market,” says Cresco.

The $282.5-million deal would see Cresco pay $55.0 million in cash and $227.5 million in stock, with the number of shares to be issued to be based on the ten-day VWAP prior to closing. (All figures in US dollars unless where noted otherwise.)

Stanley notes that the deal is still subject to closing conditions including state approvals in Nevada, Arizona and Utah. The analyst says that the HSR clearance is a boon for Cresco but also a potential notable for the US cannabis industry in general, as the waiting period expired without a second request for information from the US Department of Justice.

“We view the development as positive, while also noting that the absence of a second request for information indicates that the DOJ’s scrutiny of cannabis M&A may be moderating,” Stanley writes.

On Cresco’s planned acquisition of Origin House, Stanley notes that the discount at which Origin House has traded has averaged 17 per cent but reached a low of two per cent on October 18, the day after the Cresco transaction was expected to clear its HSR waiting period.

“The discount has consistently increased since, and early last week, Cresco announced that the waiting period had expired, with the two companies now working towards closing the transaction on mutually agreeable terms. The discount has since climbed from 16 per cent to current levels,” he notes.

Stanley thinks that Cresco will generate fiscal 2019 revenue and EBITDA net NCI of $155 million and $16 million, respectively, and fiscal 2020 revenue and EBITDA net NCI of $747 million and $186 million, respectively. The analyst’s C$24.00 target translates to a return of 180 per cent at press time.