Cresco Labs Calls Antitrust Review a “Transformative Opportunity”

- August 22nd, 2019

After the release of its Q2 financial results, MSO Cresco Labs shared details about its experience dealing with a review of its Origin House acquisition.

Multi-state operator (MSO) Cresco Labs (CSE:CL,OTCQX:CRLBF) is optimistic on closing its planned acquisitions despite federal antitrust reviews.

As part of its Q2 financial results reported on Wednesday (August 21), the Illinois-based MSO informed investors of a 42 percent quarter-over-quarter revenue increase to US$29.9 million.

The company credited its revenues to strong performance in Pennsylvania, Illinois and California from its 11 state operations across the US.

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However, despite the revenue gains, Cresco Labs reported a net loss for the quarter of C$3.9 million. Adjusted earnings before interest, tax, depreciation and amortization (EBITDA) for the quarter reached US$14.5 million.

Charlie Bachtell, co-founder and CEO of Cresco Labs, said the firm would have liked to close its announced acquisition of Origin House (CSE:OH,OTCQX:ORHOF) earlier, but this review now offers a “transformative opportunity for cannabis.”

After confirming its intention to buy California-based distributor Origin House in an all-share deal worth C$1.1 billion — with the transaction originally planned to close in June — the MSO faced second requests for information from the Department of Justice based under the Hart-Scott-Rodino Antitrust Improvements Act of 1976.

This request for information relates to reviews of proposed transactions the federal agency may believe could “substantially lessen competition.”

While these reviews can be arduous events, Bachtell said he is confident in his company’s ability to get the transaction done.

“The fact that a federal agency is reviewing (a mergers and acquisitions) transaction in this industry must be seen as validation,” Bachtell said during a call discussing the company’s earnings.

“They are acknowledging the existence of this industry and running our transaction through the same process as traditional industries,” he said.

Bachtell further added that this review offers Cresco Labs with a chance to work directly with the Department of Justice and help with providing a better understanding of the marijuana industry.

Fellow marijuana company 4Front Ventures (CSE:FFNT,OTCQX:FFNTF) recently faced a similar review from the federal authorities for its merger with Cannex Capital Holdings. However, the company elected to adjust its approach to the review to make it so the transaction was completed in July.

“Upon substantive review … the companies determined that the current business combination is not reportable under HSR and subsequently the parties withdrew their filing with the US Federal Trade Commission,” a June company press release said.

Josh Rosen, CEO of 4Front, told the Investing News Network (INN) he sees these reviews as a way for the Department of Justice to learn about the marijuana industry.

“It’s a new, emerging industry from their lens,” he said.

During a conference call with investors, Rosen explained the entire process was now behind his company: “Thankfully, I can express with confidence that we’re through that chapter.”

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Update on development of US market for Cresco Labs

Bachtell offered an insight into what the acquisition plan for the company will be moving forward. “We are now present in every state that we need to be in,” he said. The MSO will no longer look to expand its state presence but instead achieve a more significant market share through its acquisition strategy.

During the call with analysts and investors, the executive team of the company offered a snapshot update on its performance in several key markets such as Illinois, which is set to open its doors to recreational marijuana in January 2020.

The MSO plans to have five dispensaries open by Q1 2020 in Illinois.

Bachtell said this state is one of the rare instances where the market has noticed a limited license state. This means meaning few public players have obtained the required licenses to operate marijuana assets in a state where a large demand from the consumer population numbers is expected.

The company is planning the rollout of its new national retail line, named Sunnyside, with the first store planned for Philadelphia, Pennsylvania, in November. Future locations are also planned in Florida, Illinois, Ohio, Arizona, Massachusetts and Michigan.

The executive team of the MSO linked the planned consumer experience at a Sunnyside store to that of an Apple (NASDAQ:AAPL) store with premium products and a modern look. This comparison has become a staple of the cannabis industry.

Analyst launches coverage of the MSO

As part of the launch of coverage into the US cannabis space, Echelon Wealth Partners assigned a ‘Speculative Buy’ rating to Cresco Labs, with a one year price target of C$15.

Matthew Pallotta, equity research analyst at Echelon Wealth, holds a bullish take on the company, writing to investors that he expects the MSO to complete its critical acquisitions for businesses in Florida, New York, California and Massachusetts.

“Closing of these acquisitions will establish Cresco as one of the largest cannabis operators in the US,” he said in his note.

Shares of Cresco Labs opened on Thursday (August 22) at a price of C$11.64, a minor jump from its close of C$10.93 on Wednesday. However, as of 2:00 p.m. EDT, shares of the company dipped 0.91 percent to C$10.83.

Don’t forget to follow us @INN_Cannabis for real-time news updates!

Securities Disclosure: I, Bryan Mc Govern, hold no direct investment interest in any company mentioned in this article.

Editorial Disclosure: 4Front Ventures is a client of the Investing News Network. This article is not paid-for content.

The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.

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