Just days after Verano Holdings Corp. (CSE:VRNO) (OTCQX: VRNOF) notified Goodness Growth Holdings, Inc. (CSE:GDNS) (OTCQX: GDNSF) of its intentions to ditch a deal to acquire the Canadian cannabis producer, Goodness Growth revealed a plan to commence legal proceedings against Verano. Goodness Growth, previously known as Vireo Health International, will seek significant damages for, among other things, a material breach of the agreement, failure to discharge its obligations thereunder and a breach of good faith and honest contractual performance.
The two cannabis companies initially entered into a $413 million deal in February. Had it been executed, the acquisition would have ramped up Verano's footprint to 18 states, with active operations in 15, including 17 cultivation facilities totaling 1.3 million square feet of cultivation capacity and 111 operational dispensaries.
However, given that it owns one of the ten licenses in New York and that in order to sell marijuana outside of a medical program statewide, multi-state operators (MSOs) need to pay a fee of $20 million, Goodness is experiencing a similar fate as MedMen Enterprises Inc. (OTCQX:MMNFF) (CSE:MMEN), when Ascend Wellness (CSE:AAWH) (OTCQX:AAWH) walked away from their agreement.
The epilogue of that story was a months-long legal process.
Still, some multi-state operators, like Curaleaf Holdings, Inc. (OTCQX:CURLF), Green Thumb Industries (OTC:GTBIF) and Cresco Labs Inc (OTC:CRLBF) don't consider the New York cannabis market to be a sinking ship, Cantor Fitzgerald's analyst Pablo Zuanic said in his recent note.
"Of the 10 NY incumbents, based on public record, only the management of Curaleaf, Green Thumb, and the soon-to-merge Cresco/Columbia Care still seem upbeat on the NY outlook for the current med licensees (more from a wholesale perspective than retail)," the analyst said.
What About Cresco/Columbia Care Deal?
Cresco CEO Charlie Bachtell, a keynote speaker at the recent 2022 Benzinga Cannabis Capital Conference, said the previously announced deal to acquire Columbia Care Inc. (NEO: CCHW) (CSE:CCHW) (OTCQX:CCHWF) (FSE: 3LP) is imperative to its rapid strategic footprint, as Cresco now has a presence in 18 markets.
"When we bring the Columbia Care footprint and Cresco together — that'll contribute to at least $100 million at the level of geographic diversification," he said.
That deal is expected to close by the year's end. Zuanic said that finding no buyers for the assets that Cresco would need to divest to get state-level approval would be a reason to prevent the closing of the deal.
"It seems to us that both sides are in agreement (unlike in the case of Verano/GDNSF), so the issue is about finding buyers for the assets they will need to divest to get state-level approval ("a complex process," according to management)," the analyst said. "If there were no buyers (especially under current market conditions), that would prevent the deal from closing unless management were willing to shutter operations in those states with overlap."
M&A Activity On Hold, Potential Targets
Meanwhile, Zuanic expects valuations for all US marijuana stocks to go up in a scenario where SAFE Plus gets the green light, allowing companies with "stretched balance sheets" to raise funds to fuel further consolidation.
Until then, M&A activity will probably be put on hold. "We think uncertainty around SAFE Plus will probably delay M&A activity until after the lame-duck session."
If and when the Biden Administration opts to de-schedule cannabis and Congress approves a broad legalization framework before November 2024, mid-size and smaller operators would end up sold, the analyst continued.
Moreover, depending on the anti-trust attitude within states, companies with well-positioned footprints will be more attractive for potential buyers - larger MSOs - Zuanic said, citing Jushi Holdings Inc. (CSE:JUSH) (OTCQX:JUSHF), Ascend, Ayr Wellness Inc. (CSE:AYR) (OTCQX:AYRWF), TerrAscend Corp. (OTCQX:TRSSF) (CSE:TER), 4Front Ventures Corp. (OTCQX:FFNTF) and Goodness Growth as potential targets.
Lastly, the analyst said that MSOs such as Cresco, Curaleaf, Green Thumb, and Trulieve Cannabis Corp. (CSE:TRUL) (OTCQX:TCNNF) have the "greatest five-year upside potential."
Photo: Benzinga Edit, Source: Pixabay
