Cresco Labs Inc. and Columbia Care Inc. investors have signaled that a major merger in the cannabis space may be struggling to reach the finish line, analysts said.
In March 2022, Cresco Labs
announced plans to buy Colombia Care
in a stock-for-stock transaction valued at $2 billion.
Currently, the combined market capitalization of both companies is less than $1.1 billion.
Cresco Labs agreed to pay 0.5579 shares of its stock for each share of Columbia Care. In the past 12 months, Cresco Labs’ stock has lost 71% of its value, and Columbia Care is off by 75% over the same period.
Based on current prices on Monday of $1.90 a share for Cresco Labs and 71 cents a share for Columbia Care, Cresco would pay $1.06 a share for Columbia Care, or a premium of 49%. When the deal was originally announced, Columbia Care was valued at about a 16% premium.
Analysts at Viridian Capital tracked the price difference in the shares of the two companies and noted that the arbitrage spread in stock prices was 52.6% on Jan. 27 and reached 63.1% on Jan. 30. It was down to 42.3% on Friday.
But the price differences generally signal “considerable market doubt about closing this transaction,” particularly when the spread widens, Viridian said last week.
Lower equity prices are also reducing the likely proceeds from asset sales in Ohio and Florida and may push the deal’s close into the second quarter, Viridian said.
Cresco Labs is planning to sell some assets to music mogul Sean “Diddy” Combs for as much as $185 million: four retail stores and one production asset in New York state, three retail stores and one production facility in Massachusetts and two retail stores and one production asset in Illinois.
When Cresco Labs announced the deal with Combs, it said it would likely close its Columbia Care deal at the end of the first quarter instead of the end of 2022.
Some of the doubts about closing the deal stem from higher interest rates that have dampened activity in the corporate merger market.
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