PHOTO Bruce Guenter

The Chicago-based Cresco Labs bought California company Origin House, both relatively new outfits, in a stock deal worth more than $1 billion… on the Canadian exchange.

On April 1, Cresco Labs, a publicly traded cannabis company based in Chicago, announced an all-stock purchase of Origin House, a California-based “products and brands company” in the same space.

If stock prices stay steady when shareholders of both companies vote on the deal — and if shareholders approve it — the acquisition is valued at roughly $1.1 billion in Canadian dollars, around $826 million U.S. Which is to say this takeover would then have the honor of the biggest-ever transaction in the cannabis industry, supplanting troubled MedMen’s $682 million all-stock takeover of PharmaCann.

If this is the first time you’ve heard of either Origin House or Cresco Labs, you are not alone. Both companies are relatively new — and new even by the very fresh and fast standards of the cannabis space. So what does the deal mean, aside from many numbers and a splashy press release, handy for drumming up interest among investors?

Meet the Players

To use a tired and imperfect but good enough analogy, the purchased entity Origin House is a sort of liquor distribution company. Origin House has five distribution and manufacturing licenses in California, where it claims to deliver “over 130 branded cannabis products to the majority of licensed dispensaries.” Alternately called a “brand house” or a “brand accelerator,” the company is clearly banking on consumers’ penchant for recognizable products. Origin House is headquartered in Ottawa, Canada — where it trades under the name CannaRoyalty — and trades on markets in both Canada and in the United States. Brands you might know that Origin House distributes include Bhang Chocolates; Tommy Chong’s branded cannabis, Chong’s Choice; Défoncé Chocolatier, and Kurvana oil cartridges.

On the buyer’s side, the company’s Illinois home base is a good place for a young and ambitious cannabis company with a decent amount of runway. The state is heavily populated, new Gov. J.B. Pritzker says he wants to legalize recreational marijuana — though as the example of New Jersey demonstrates, governors make such bold promises at their peril — and entry into the market there is still restricted, meaning licensed companies get a bigger piece of the pie. The state caps the number of cultivation and retail licenses, and Cresco already has a couple there as well as in Ohio, Pennsylvania, Florida, Arizona, Nevada and California.

So, What’s the Deal, and What Does it Mean?

It’s a stock deal. No cash will exchange hands. Cresco will swap 0.8428 of its shares for each Origin House share. Origin House shareholders will become Cresco shareholders, then the two companies will become one.

Since cash is best used for things like paying states tens or hundreds of thousands of dollars for distribution licenses, which then may pay off down the road many times more, stakes in companies are an attractive alternative.

Cresco has major national ambitions and, if the deal goes through, a major national presence. In fact, it’s possibly one of the largest cannabis bodies in the United States, with 51 retail licenses and 1.5 million square feet under cultivation in 11 states, as Cresco CEO Charlie Bachtell said in a press release.

But Origin House shareholders must approve the deal, which would close by the end of June and not every shareholder is thrilled. Jerome Hass, a portfolio manager at investment firm Lightwater Partners, appeared on Bloomberg Canada to share why he was “underwhelmed” and plans to vote against the deal.

Essentially, he said, it’s a stock-market play aimed at boosting prices in both companies’ stock — and if you are trying to build a company long term, profit longevity should take priority instead. On top of that, he added that American investors aren’t excited about investing in either the Canadian exchanges or the OTC sheets, where both companies trade. OTC stocks’ statements are not audited by the Securities and Exchange Commission, like stocks on NYSE or NASDAQ.

Therein lies the risk in dealing with companies in early or middle stages who are already publicly traded, and the risk in getting too excited about this deal — which isn’t even final. But it sure does make for a catchy headline.

TELL US, do you have any stock in the Canadian market?