Cannabis MSOs Cresco Labs, Columbia Care terminate planned merger

Cannabis multistate operators Cresco Labs and Columbia Care are officially walking away from their planned merger, a deal that was valued at $2 billion when it was announced in March 2022.

There are no costs associated with terminating the deal, according to a Monday news release.

“In light of the evolving landscape in the cannabis industry, we believe the decision to terminate the planned transaction is in the long-term interest of Cresco Labs and our shareholders,” Charles Bachtell, CEO and co-founder of Chicago-based Cresco Labs, said in a statement.

The deadline to close the deal had been delayed twice, most recently until June 30.

Then, on June 30, the companies announced they had not divested overlapping assets required by marijuana regulators in several states.

The terminated deal also means that the companies’ plans to sell assets in Illinois, Massachusetts and New York to rapper and business mogul Sean “Diddy” Combs have been terminated, effective July 28, according to the release.

The sale to Combs would have created the largest Black-owned marijuana multistate operator in the United States.

Earlier this year, New York-headquartered Columbia Care streamlined its operations, laying off 25% of its corporate employees and shuttering some operations.

“Over the last 16 months we have reviewed every aspect of our business, remained decisive and have made substantive changes that significantly improved our operations – positioning us with significant strategic and operational strength at this inflection point in the company’s history,” Columbia Care CEO Nicholas Vita said in a statement.

What happened?

A spokesperson for Cresco told MJBizDaily that the companies were struggling to divest assets, as required, in Florida and Ohio this spring and summer.

“Every time we would get close, financing would fall through because of the capital landscape,” the spokesperson said.

Capital markets have been challenging for the U.S. cannabis industry, burdened by high interest rates, low share prices, the slow pace of federal marijuana reform, inflation and wholesale cannabis price compression.

“At its core, it seems that continuing macro-level challenges in a number of U.S. markets and a relatively shallow pool of investment dollars coming into the industry made the required pending asset dispositions less attractive than originally anticipated,” Matt Bottomley, an analyst for Toronto-based Canaccord Genuity, wrote in a July 31 newsletter.

Shares of the AdvisorShares Pure US Cannabis ETF (MSOS on the New York Stock Exchange Arca) – which includes some of the country’s largest multistate operators – have fallen from around $20 in March 2022 to just over $5.

Before the Cresco-Columbia deal was announced in March, the price of shares of Cresco Labs (CL on the Canadian Securities Exchange; CRLBF on the U.S. over-the-counter markets) fell from approximately $6.50 to just over $1.50 on Friday.

Over the same time period, shares of Columbia Care (CCHW on the CSE; CCHWF on the OTC markets) fell from $3.10 to a little more than 40 cents.

Citing these challenges, equity analysts were not surprised at the announcement of the terminated deal.

“The operational downturn on the back of this, alongside the combined debt of a merged company (with rapidly approaching maturities on the [Columbia Care] side), and then the difficulty in divesting assets as required by the merger (with assets now valued much lower than was the case, as well as a risk that potential buyers can actually get the cash together), meant the deal prospects looked increasingly slim,” Owen Bennett, senior vice president of equity research at New York-based financial services firm Jefferies Group, wrote in a July 31 newsletter.

Combs ‘committed to exploring opportunities’

The creation of the country’s first Black-owned cannabis MSO was also contingent on the deal closing between Cresco Labs and Columbia Care.

Combs Global, led by the rapper and business mogul known as “Diddy,” agreed to buy both production and retail assets for up to $185 million last November.

“For an industry in need of greater diversity of leadership and perspective, the substantial presence of a minority-owned operator in some of the most influential markets in the country being led by one of the most prolific and impactful entrepreneurs of our time is momentous … and incredibly exciting,” Cresco’s Bachtell said at the time of the announcement.

Though that deal also has been terminated, Combs Global President Tarik Brooks said the company hasn’t walked away from cannabis entirely.

“Combs Global remains committed to exploring opportunities and pushing for diversity in the cannabis industry,” he said.

Looking ahead

Cresco Labs will now focus on “swift restructuring of low-margin operations, improving competitiveness and driving efficiencies in markets where we maintain leading market share, and scaling operations to prepare for growth catalysts in emerging markets,” Bachtell said in a statement.

Columbia Care released a more detailed outline of its accomplishments so far this year as well as its plans for the third quarter in a separate news release.

That outline includes:

• Pursuing uplisting to a senior U.S. exchange and, in the interim, consolidating its shares on to Cboe Canada, formerly known as the NEO Exchange, and delisting from the Canadian Securities Exchange.
• Completing a corporate restructuring plan.
• Finalizing discussions with the largest holders of its 13% senior secured notes due in May 2024 to exchange into the company’s 9.5% senior secured notes, due in February 2026, on a one-to-one basis.
• Closing the sale of a 36,000-square-foot cultivation facility and retail outlet in downtown Los Angeles.
• Appointing two new members to the executive team: David Hart, as president and chief operating officer; and Jesse Channon, as chief commercial officer.

“With the uncertainty of the past 16 months behind us, along with the enthusiasm and energy that accompanies moments of renewal, our team welcomes the next stage of Columbia Care’s growth and expansion,” Columbia Care’s Vita said in a statement.

Source: https://mjbizdaily.com/cresco-labs-columbia-care-terminate-planned-cannabis-merger/