Adam Jackson
Cresco Labs has set its sights on the multibillion dollar merger with Columbia Care, with a goal to finalize the process by the end of June. But even with the summer deadline around the corner, challenges in the planned consolidation remain, according to Cresco’s management on a call to discuss the company’s latest earnings report.
“The way to look at it really is there are several things that are within our control, and there are several things that are outside of our control as it relates to the transaction,” CEO Charles Bachtell told investors.
One of the critical factors within Cresco’s control, according to Bachtell, is the company’s ongoing efforts to divest certain assets.
“The divestitures and the resulting proceeds from those are a big component of our ability to get the combined debt leverage ratio in the right spot,” he said.
The CEO admitted that the situation remains fluid, especially concerning the divestitures, but insisted that the deal could still make financial sense depending on the outcome of these transactions.
“It really does come back to … whether or not we can make the deal makes sense,” he said. “We’ll continue to update the public as we have more definitive information on those divestitures.”
At the same time, the ambiguity behind both companies’ rhetoric over the past year has sparked more concerns and questions from investors and analysts looking to understand how the cannabis giants will navigate the path forward.
Strategic planning aside, financial implications weigh heavily on the proposed merger.
With both Col-Care and Cresco not yet achieving free cash flow positivity and having near-term and long-term debt due, what a post-merger entity will look like has been hard to predict.
On the call, Andrew Partheniou of Stifel expressed concern about the timing of the sell-offs and the process to extend the outside date for the merger.
“Whether we extend or not is a board-level discussion and decision,” Bachtell responded.
Alternative Strategies
In a speculative scenario where the merger with Columbia Care falls through, Bachtell assured investors that Cresco has alternative strategies in place for growth.
He noted the company’s strong presence in Illinois, where the market is expected to double in the next two to three years. Additionally, Cresco has significant growth prospects in Pennsylvania, Ohio, and Florida, where legalization of adult-use cannabis is anticipated.
Dennis Olis, CFO of Cresco Labs, said that $14 million of the company’s $21 million first-quarter capital expenditures were associated with new store openings, primarily in Florida. Olis also revealed plans for more store openings in Pennsylvania and ongoing facility expansion in New York.
Expanding in New York is another focus for Cresco, having already invested heavily to comply with state regulations.
Part of that concern stems from the companies’ proposed deal with Sean “Diddy” Combs. That agreement promised $185 million in exchange for debt repayment, but New York’s regulations limiting retail operators to three adult dispensaries has thrown a wrench in the plans.
The overall crash in equity prices has also affected expected proceeds from proposed asset sales in Ohio, Maryland, and Florida. Consequently, the post-merger entity could be left with more questionable liabilities in the end.
“The net result is a combined company with more debt than initially planned at refinancing rates that continue to climb,” Viridian Capital Advisors’ director of data analytics Frank Colombo wrote in a March note. “The deal has gone a long way down the tracks towards closing.”
Despite the questions, Olis reaffirmed that the Diddy deal “is still there.”
“The others remaining are really Ohio and Florida,” he said, adding that Florida has been challenging due to changes in the regulatory environment, including the movement towards issuing new licenses.
Whether the companies can hammer out a deal that satisfies both financial and strategic objectives by the June deadline remains to be seen.
