Cresco Labs Inc CRLBF and Columbia Care Inc CCHWF announced the signing of definitive agreements to divest certain New York, Illinois, and Massachusetts assets to an entity owned and controlled by Sean “Diddy” Combs.
Cantor Fitzgerald’s Pablo Zuanic Analysis
“Cresco Labs has signed a definitive agreement to divest assets in IL/MA/NY for $185Mn to an entity owned and controlled by Sean Combs ($110Mn cash up front, which we assume will be easily funded),” Pablo Zuanic said. “We stay Overweight Columbia Care owing to the Cresco deal, and we maintain our price target of $8.37 (based on our PT for Cresco, taking the exchange the ratio of 0.5579).”
According to Zuanic’s analysis, “this meaningfully increases the probability that Cresco’s deal to acquire Columbia Care (CC) will close (by end of 1Q23) (as per the latest guidance vs. year-end before), and with no modifications. What is left to sell: only Ohio assets (vertical operation), a small processing unit in Maryland, and the Florida paper license.”
The analyst also noted that, although not required, the company may opt to also sell some of its assets in Florida and Pennsylvania for efficiency purposes.
“Based on comps, we think the FL license could be worth $50Mn (although comps may be dated), OH >$30Mn, and MD ~$5Mn. So, if we add other assets to be sold (FL/PA), potentially, we think the company will reach the guidance of $300Mn in gross proceeds from asset sales,” he added.
In short, “the strong Cresco franchise in Illinois remains intact, and the New York production assets (in build-out mode mainly) also, stay in-house (CC greenhouse in LI; new CL facility in the Hudson Valley).”
“We are buyers of Cresco with a PT of $15, which equates to $8.37 for CC,” noted the Cantor analyst.
Additionally, Columbia Care will report its 3Q22 results on November 14 after the close, call at 4.30 pm ET. “We project 2% seq sales growth vs. guidance for “up mid-single digits,” is the updated estimate by Cantor’s Analysts.
The buyer entities will purchase certain Cresco and Columbia Care assets in New York, Illinois, and Massachusetts. “At the closing of the transaction, a portion of the $185Mn purchase price will be paid as $110Mn in cash and $45Mn in seller notes. The remaining $30Mn will be payable post-closing based on short-term goals and market-based milestones,” reads the market report.
- New York: These assets include three Columbia Care stores (Brooklyn, Manhattan, and Rochester), and a Cresco store in New Hartford. The production asset sold is a Columbia Care facility in Rochester. “Cresco recently broke ground on a future 433K sq ft facility in Ellenville in Ulster Country (Hudson Valley) and Columbia Care owns a greenhouse space of 740K sq ft (not developed yet) in Riverhead,” reads the report.
- The Massachusetts assets include two Cresco stores (Worcester, Leicester) and a Columbia Care store (Greenfield), plus a Cresco production asset in Leicester (~20K sq ft).
- Illinois: These assets include two Columbia Care stores (Jefferson Park, and Villa Park), and Columbia Care production assets in Aurora.
- What is left to divest: The OH vertical operation (5 stores plus capacity), a small processing unit in MD, and the FL paper license. “The company may opt, although it is not required, to also sell part of its assets in FL and PA for efficiency purposes,” according to Cantor’s view.
Valuation and Price Target
“Our latest published price target for Cresco is US$15. If we take the deal exchange ratio of 0.5579, this equates to $8.37 (hence, our PT for Columbia Care),” Zuanic said. “Taking the intraday share price (11 am ET) for CL of $3.25, Columbia Care ($1.60) is trading at a 12% discount to the offer price ($1.60/$1.81).”
On their CY23 estimates, Columbia Care “trades at 2x CY23 sales (MSO average 2.2x) and 12.2x EBITDA (9.2x). Our CY23 estimates are 6% below FactSet consensus on sales, and 25% below EBITDA),” Zuanic concluded.
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