Bottom Line

We always expected a deal to get done and now we have confirmation Cresco Labs (CSE: CL) is going ahead with the acquisition of Origin House.

The deal terms have been renegotiated less than we expected with Origin House investors now receiving only 17% less shares of Cresco.

The only risk remaining for Origin House investors is if Cresco stock keeps falling.

The news that Origin House is doing a new equity deal will dilute current shareholders by about 8%, but with the stock still 25% below the implied offering price, there is money to be made by buying Origin House.

This deal is going to close. The new terms are agreed, both parties are motivated and Origin House has already found investors for the $30 million equity raise that was a contingency for the deal to close.

The only risk remaining for Origin House investors is if Cresco stock keeps falling.

The $1.00/sh gap between the implied deal price today and Origin House’s stock price is likely explained by the borrow cost for shorting Cresco Labs. Let us explain.

Why a $1.00 Profit Remains in Origin House

If you wanted to bet on the deal closing with no risk, you would go short Cresco Labs and buy Origin House stock. You have now locked in your 25% gain regardless of how either stock moves from now until the deal closes.

However, it costs money to go short Cresco. We don’t know the exact monthly cost but based on the 25% spread between the deal terms and the current Origin House stock price we assume short-selling Cresco costs at least 12% a month.

The deal is expected to close in two months which is how we got to a borrow rate of 12% per month.

So if you were thinking of locking in your gains with a short and long position, there isn’t any money left to be made.

However, retail investors can still make a profit if the Origin House discount doesn’t fade.

There are two ways to play this in our view.

  1. Sit on the sidelines and buy Origin House in the middle of January if it continues to trade at more than a 10% discount to the deal terms. You limit the days your position can fall further by buying just before the deal closes.
  2. If the U.S. cannabis market catches a bid and Cresco starts going up again, the risk that your converted Cresco shares are going down in value has been removed. Origin House stock should track Cresco and will go up as well.

This merger has been one of the more interesting cannabis stories to watch and we expect both stocks will continue to oscillate until the deal closes.

Volatility creates opportunity.

25% Return Still Up for Grabs in Origin House (Purple Area)

Source: Yahoo Finance Prices as of 1:00pm November 11th

New Details of the Deal

Previously in limbo as stock prices have fallen since its original announcement back in April, the deal for Cresco Labs Inc. (CSE: CL; OTCQX: CRLBF) to pick up Origin House is now moving forward on amended terms.

Both sides returned to the negotiating table after the end of the Hart-Scott-Rodino Antitrust Improvements Act 30-day waiting period last month. Since the all-stock acquisition deal was first revealed, Cresco’s stock price has fallen by more than 50% and the cannabis industry has seen major changes.

Under the newly amended acquisition terms, CannaRoyalty Corp. (CSE: OH, OTCQX: ORHOF) doing business as Origin House will enact a non-brokered financing of 9.7 million common shares at a price of C$4.08 a share.

That financing will end up at a price of C$39 million, with that full amount to be held in escrow until the acquisition formally closes and then used to strengthen the company’s overall financial position. Money owed to previous Origin House service providers will also be paid on common shares ahead of the deal’s closing.

In addition to those changes, the biggest impact to the overall terms is in a reduction of Cresco shares to be issued. The original 0.8428 subordinate shares of Cresco to be issued in exchange for each common share of Origin House has now been reduced to 0.7031 shares, a 17% reduction.

Discussing the importance of gaining increased California distribution through the Origin House Continuum platform as well as utilizing the FloraCal Farms cultivation site, Cresco CEO Charlie Bachtell commented:

This is a transformational deal, which will significantly accelerate Cresco Labs’ growth in California, while providing a launchpad for the combined company to develop and distribute best in class brands across the country. We are very pleased that our groups were able to mutually develop elegant solutions enabling this very important transaction to progress toward closing.

The newly amended terms will need to be approved once again by current investors, with a special meeting to be held in December to get the nod from Origin House shareholders before moving forward.

If approved and no other regulatory hurdles delay the pending deal, Cresco is expected to acquire Origin House by mid-January of 2020.

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