Cresco Labs Inc. (CL:CSE; CRLBF:OTCQX) and Columbia Care, two U.S.-based cannabis sellers, decided to terminate their previously agreed upon transaction in which Cresco would acquire Columbia, reported ROTH Capital Partners analyst Scott Fortune in a July 31 research note.
"The agreed deal (March 2022) was unable to finalize primarily due to the challenging cannabis macroenvironment leading to the inability to divest necessary assets (limited investment capital in cannabis) to meet regulatory approval," Fortune explained. "Both parties recognized the difficulties and parted ways with no break-up fees or penalties."
Rating, target price unchanged
ROTH reiterated its Neutral rating on Cresco Labs, given it believes the ending of the deal was already priced into the cannabis firm's shares, noted Fortune.
The financial services firm also kept its 12-month target price of $1.75 per share on Cresco, currently trading at $1.57 per share in comparison. The price difference reflects an 11% potential gain for investors.
Near-term growth possible?
How Cresco Labs is going to garner topline growth in the near term is a concern, Fortune wrote. This is because it lacks a significant presence in any of the expanding emerging markets, such as Maryland, New Jersey and Virginia, which recently legalized recreational cannabis use. Cresco was going to gain these markets through its acquisition of Columbia Care.
As such, ROTH expects quarter-over-quarter revenue growth for Cresco Labs to remain flat for the rest of 2023. It anticipates year-over-year topline growth this year to be about 6%.
Thus, Fortune wrote, "We remain cautious on [the company]. We look for additional color to update our financial model after Cresco's Q2/23 earnings call sometime in August."
Retrenching methods
With the merger in the rear-view mirror, Fortune wrote, Cresco Labs "can now focus on adding margin-accretive growth opportunities in existing and new emerging markets" to generate cash flow.
Management intends to do just that, continue pursuing and driving scale in higher-margin operations. Regarding its existing lower-margin operations, such as those in California and in other markets experiencing price pressure, Cresco will re-evaluate and potentially restructure those.
Also, the company will maintain its consumer packaged goods approach but likely shift toward adding retail, as it "needs increased verticality with more owned retail assets," noted Fortune.
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