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Biggest-ever U.S. cannabis acquisition deal helps boost buying in marijuana sector

MarketWatch logo MarketWatch 2019-04-02 Tomi Kilgore
a blue and white airplane in the sky: DionyMed’s Hometown Heart terminates relationship with Eaze Technologies after review of business practices.© Getty Images DionyMed’s Hometown Heart terminates relationship with Eaze Technologies after review of business practices.

A C$1.1 billion cannabis deal announced Monday helped to spark a broad rally in the broader marijuana sector to start the second quarter, even if shares of Origin House fell Monday as news broke of its acquisition by Chicago-based Cresco Labs Inc.

The ETFMG Alternative Harvest exchange-traded fund (MJ) rose 0.9% in afternoon trade, with 24 of 34 components trading higher. The ETF had soared 46% in the first quarter, the largest quarterly gain since inception in December 2015.

The Horizons Marijuana Life Sciences Index (CA:HMMJ) advanced 0.5%, after rocketing 50% in the first quarter.

In comparison, the S&P 500 index (SPX) advanced 1.1% Monday, after rising 13.1% in the first quarter, the best quarterly performance since the third quarter of 2009.

The U.S.-listed shares of Origin House, the registered business name for Canada-based CannaRoyalty Corp. (ORHOF) sank 5.8%, to pull back from Friday’s record close, after Cresco Labs (CRLBF) announced the deal before the start of regular trade on Monday. Cresco boasted that the deal, valued at an equivalent $825.9 million at current currency exchange rates, represented “the largest public company acquisition in the history of the U.S. cannabis industry.”

Under terms of the deal, Cresco will exchange 0.8428 of its shares for each Origin House share outstanding. Based on Friday’s closing prices of the companies’ U.S.-listed shares, the exchange ratio would value Origin House’s stock at $9.48 each, a 4.9% premium.

Cresco’s stock slipped 0.5% in afternoon trade.

“[The deal] establishes Cresco Labs as the leading multi-state operator with one of the largest distribution platforms in California, which is projected to be a $7.7 billion cannabis market in 2022 by Arcview Market Research/BDS Analytics,” said Cresco Chief Executive and Co-founder Charlie Bachtell. “Following the closing of this acquisition, Cresco brands will be in over 725 dispensaries across the country, giving us the largest and most strategic distribution footprint of any cannabis company in the United States.”

Origin House’s stock has nearly tripled (up 176%) over the past 12 months, while Cresco shares have run up 89% over the period.

Elsewhere, shares of Aphria Inc. (APHA)(CA:APHA)surged 6.7%, after the company said its Aphria Deutschland GMBH subsidiary launched its first cannabidiol (CBD)-based nutraceutical, to be the first CBD-based cosmetics line for the German market.

Aphria said the CannRelief brand of products are being produced in the European Union, with the CBD oils being sold in both a 5% and 10% CBD concentration.

DionyMed Brands Inc.’s stock (HMDEF) fell hiked up 3.5%, erasing earlier losses of as much as 7.8%. The company announced late Friday that its California delivery service Hometown Heart has terminated its relationship with customer-acquisition services company Eaze Technologies Inc. DionyMed said following a review of Eaze’s business practices, it couldn’t confirm that Eaze’s credit card payment-processing methodology met regulatory compliance requirements.

“Deliveries made through Eaze in San Francisco and Oakland were providing approximately $2.9 million in revenues per month to [DionyMed] at an approximate 8% EBITDA [earnings before interest, taxes, depreciation and amortization] margin,” analyst Bobby Burleson at Canaccord Genuity wrote in a research note. “In the short term, we see a drag on [DionyMed] results both in terms of revenues and EBITDA as the company invests to grow its internal ‘Chill’ branded [direct-to-consumer] delivery service.

Burleson “modestly” reduced his 2019 revenue and EBITDA estimates, while affirming his 2020 estimates.

“Longer term, Chill should enhance margins (Cali Chill EBITDA margins roughly 30%), as it replaces lost Eaze revenue,” Burleson wrote.

Why the future of Canada's cannabis industry is not smoking products After Canada became the second nation in the world to legalize recreational marijuana, the cannabis industry is betting on edibles and beverages to drive future growth.

Among other more-active weed stocks, Aurora Cannabis Inc. (ACB)(CA:ACB) rose 1.4%, after soaring 83% in the first quarter, to lift its market capitalization to over $9 billion.

Shares of Cronos Group Inc. (CRON)(CA:CRON) advanced 1.2%, Canopy Growth Corp. (CGC)(CA:WEED) gave up 1.7%, CannTrust Holdings Inc. (CTST)(CA:TRST) rose 4.2%, Hexo Corp. (HEXO)(CA:HEXO) climbed 2.0%, Tilray Inc. (TLRY) shed 4.3% and Aleafia Health Inc. (CA:ALEF) swung higher to a 1.1% gain.

MedMen Enterprises Inc.’s stock (MMNFF) slipped 1.4%, after rising 8.9% the first quarter. The company said before the open at it closed its acquisition of licensed cannabis retailer northern California-based Sugarleaf Trading Co., to give it 32 operational stores in 12 states.

Here's how to invest in cannabis through ETFs Investing in marijuana or cannabis stocks can be risky. Small companies that are actually handling and growing marijuana might not be legal at a federal level. Here's what you need to know.

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