Chicago-based cannabis giant Cresco Labs announced it will acquire rival Columbia Care in a $2 billion all-stock transaction that will create the largest cannabis company in the U.S. It’s the latest in a series of large scale M&As, as cannabis operators rush to corner the market and attract investment in advance of federal cannabis reform.
"This is the definition of a transformational deal when you have two industry leaders really coming together that find the opportunities for these complementary synergies in business footprint, business focus, and expertise," Charlie Bachtell, CEO and founder of Cresco Labs, told Cheddar News.
Terms of Cresco Labs’ acquisition value Columbia Care at about a 16 percent premium compared with Tuesday’s market close. If the acquisition closes, Columbia Care shareholders will hold about 35 percent of Cresco Labs' shares.

A ‘Perfectly Suited’ Pairing

The combined company will have more than 130 retail stores across 18 markets, giving it the second-largest retail footprint in the industry, according to a release. Columbia Care and Cresco Labs, independently, top the market in Colorado, Illinois, Pennsylvania, and Virginia. They claim the top three in market share in four other states, including New York and New Jersey, where sales are projected to begin within months. The combined company will have access to 55 percent of the U.S. population and more than 70 percent of the addressable cannabis market, per the announcement.
Jefferies analysts called the acquisition "perfectly suited" in a note published on Wednesday, remarking that Cresco’s main shortcomings were missing states in its footprint, while Columbia Care "established an excellent geographic footprint, but lacked any scale overlaying this."
"The combined company will have scale across most key states, industry-leading brands and wholesale across these states, and much-improved margin profile,” the note reads.
Jefferies’ analysts also noted margins should improve within the combined companies following the transaction, as a result of increased scale across states and cost savings in states where operations overlap, among other things.
In some cases, however, that operational overlap could require divestitures.  In New York, for example, Columbia Care and Cresco Labs each hold one of 10 medical cannabis licenses. But Bachtell viewed instances of overlap as assets and opportunities.
"The states that we do have overlap are also the most sought after, valuable licenses to have, so there is a big market to acquire these licenses that we may need to divest," Bachtell said.
Columbia Care's second adult-use cannabis dispensary in the Chicagoland area. (Photo: Business Wire via AP)

Acquisition 'Arms Race'

The Cresco Labs and Columbia Care deal is the latest in a series of large-scale transactions in cannabis. Canadian cannabis giant Tilray completed a $4 billion merger with Aphria in May of 2021, followed by Florida-based Trulieve, which acquired Harvest Health and Recreation for $2.1 billion, several months later in October. Verano Holdings announced in February it would acquire Goodness Growth for $413 million, and Terrascend closed its $545 million acquisition of Gage Cannabis in early March.
According to financial advisory firm Viridian Capital Advisors, M&A is expected to accelerate in advance of federal policy reform in the U.S.
"We expect the trend will continue and even accelerate in the near term with other large operators looking to acquire smaller established players in order to increase scale in an arms race to excite investors and attract any institutional investment that is possible," the firm wrote in a report.
Bachtell added that the challenges that the cannabis industry faces as a result of being federally illegal like lack of access to traditional institutional capital and many U.S. investors provide an "innate accelerator" for M&A.
"With … federal reform, the size of this unlock in the catalyst is dramatic," he said. "You want to be the leader in the space before that happens because you want to put yourself in a position to sort of help shape it but also be identified as one of, if not the most, investable company when that access is granted."
There has been little progress federally on cannabis reform in the U.S. since President Joe Biden took office in 2021, in spite of campaign pledges that he would support limited reforms like medical cannabis legalization and cannabis rescheduling. And the clock is ticking for a unified Democratic Congress to make progress on legalization in advance of the midterm elections. 
Senate Majority Leader Chuck Schumer (D-N.Y.) has indicated he and fellow Senators Cory Booker (D-N.J.) and Ron Wyden (D-Ore.) will file their Cannabis Administration & Act in April, according to Marijuana Moment. But the sweeping, equity-focused legalization bill could be a tough sell, especially in the Senate. The Secure and Fair Enforcement (SAFE) Banking Act, which seeks to open access to banking services for cannabis companies, has broader bipartisan support but faces opposition from leaders like Schumer since it lacks equity provisions.
In its report, Viridian notes that interest in M&A could intensify due to the perception that banking reform "is now looking more and more unlikely this year."
Cresco Labs announced its Columbia Care acquisition alongside reporting fourth-quarter earnings. Cresco reported lowered-than-anticipated revenue of $218 million, a jump of 34 percent year-over-year. On a call with analysts after the report, Chief Financial Officer Dennis Olis attributed the miss to "unique and unexpected market events," like a drop in the price of bulk cannabis in California. 
Shares of Cresco Labs and Columbia Care, listed on the Canadian Securities Exchange, fell during trading. Cresco Labs closed the day down 7.4 percent, and shares of Columbia Care finished 2.3 percent lower.