A planned merger between cannabis multistate operators Columbia Care and Cresco Labs valued at $2 billion has been called off, according to a statement from the two companies released on Monday. 

Chicago-based Cresco Labs announced in March 2022 that it had come to an agreement to acquire Columbia Care, headquartered in New York, in an all-stock deal valued at approximately $2 billion. In February, the two companies unveiled a revised plan to give the firms more time to divest assets in some markets to comply with regulatory requirements.

Each already one of the largest vertically integrated cannabis companies in the United States, the planned deal between the two firms would have created the largest marijuana business in the country. But on Monday, the two companies announced that they had come to a mutual agreement to walk away from the deal, citing the regulatory and business climate facing the regulated cannabis industry. No penalties or fees related to the mutual agreement to terminate the merger will be incurred by either company.

“In light of the evolving landscape in the cannabis industry, we believe the decision to terminate the planned transaction is in the long-term interest of Cresco Labs and our shareholders,” Charles Bachtell, CEO and co-founder of Cresco Labs, said in a statement from the company.

Bachtell added that this is a “tough economic time” for the cannabis industry as a whole and that Cresco will refocus on its core business, including a “swift restructuring of low-margin operations.”

Cannabis Industry Facing Challenges

CNBC reported on Monday that the deal began to fall through when the companies failed to divest assets necessary to achieve regulatory approval by a deadline that passed on June 30. Under state licensing laws, the companies were required to relinquish assets in some markets where both firms were doing business.

In addition to the regulatory issues faced by Columbia Care and Cresco Labs, the cannabis industry as a whole has been hampered by the continued illegality of marijuana at the federal level. Sales of regulated cannabis have declined in some of the first states to legalize marijuana as markets mature, while an entrenched underground industry continues to flourish. 

Additionally, the failure of Congress to pass the Secure and Fair Enforcement (SAFE) Banking Act, a bill that would give state-legal cannabis companies access to traditional financial services, has led to a steep drop in investment in the industry. Federal regulations also impinge on regulated cannabis companies’ ability to carry out vital business functions, as was made clear last week when Mastercard warned banks and payment processors to stop allowing debit transactions for purchases of cannabis products.

Cresco Labs has a market capitalization of about $700 million, down from about $2 billion when the deal was announced, according to CNBC, while Columbia Care’s market value is about $200 million. In addition to the cancellation of the merger, the two companies noted that a November 2022 agreement to divest certain New York, Illinois and Massachusetts assets of Cresco and Columbia Care to an entity owned and controlled by Sean “Diddy” Combs has also been terminated, effective July 28, 2023.

Scrapping Merger ‘The Best Path Forward’

Nicholas Vita, the CEO and co-founder of Columbia Care, said that scrapping the planned deal was the best option for both businesses.

“After careful consideration, we are confident in the mutual decision to move forward as separate, standalone companies. This is the best path forward for Columbia Care’s employees, customers, and shareholders. We are thankful for the collaboration and partnership with the Cresco team throughout this extensive process,” said Vita. “Over the last 16 months we have reviewed every aspect of our business, remained decisive and have made substantive changes that significantly improved our operations — positioning us with significant strategic and operational strength at this inflection point in the company’s history.

Lucas C. McCann, Ph.D., the co-founder and chief scientific officer of the cannabis regulatory and compliance consulting firm CannDelta, says that the “announcement of the failed merger between Cresco and Columbia Health is an alarming trend in the cannabis industry across the country.” But he adds that the news might result in a better business environment for independent operators down the road.

“The silver lining in this situation might be the opportunities it opens up for smaller businesses. The saying ‘Be Small, Keep it All’ seems to continue to be true for emerging and mature cannabis markets, such as New York,” McCann said, where fees for large operators are high compared to those for micro businesses, “making it prohibitively expensive for big businesses to thrive in these markets.”

“These high fees for big businesses will pave the way for smaller players to make a significant impact and continue to do so as the market matures,” he added in an email to High Times.

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Cresco Labs, one of the largest cannabis operators in the United States, announced Wednesday that it had reached an agreement to acquire Columbia Care for roughly $2 billion in a deal that will make it the country’s largest multi-state cannabis operator.

Charles Bachtell, CEO of Cresco Labs, said in a statement that the “combination of Cresco Labs and Columbia Care accelerates our journey to become the leader in cannabis in a way no other potential transaction could.”

“We are incredibly excited to announce this transformative transaction today at a very important time in the development of this industry. This acquisition brings together two of the leading operators in the industry, pairing a leading footprint with proven operational, brand and competitive excellence,” Bachtell said. “The combination is highly complementary and provides unmatched scale, depth, diversification and long-term growth. On a pro-forma basis, the combined Company will be the largest cannabis company by revenue, the number one wholesaler of branded cannabis products, and the largest nationwide retail footprint outside of Florida.”

“We look forward to welcoming the incredible Columbia Care team to the Cresco Labs family. I couldn’t be more excited about this enhanced platform and how it furthers the Cresco Labs Vision — to be the most important and impactful company in cannabis,” he added.

Nicholas Vita, CEO of Columbia Care, said the merger was guided by his company’s founding mission “to deliver the best outcome for our stakeholders.”

Columbia Care is “one of the largest and most experienced cultivators, manufacturers and providers of cannabis products and related services, with licenses in 18 U.S. jurisdictions and the EU,” according to the press release from the companies on Wednesday.

“In an evolving industry, the opportunities to better achieve our mission through consolidation led us to this historic moment,” Vita said in a statement on Wednesday. “With Columbia Care’s strategic national footprint in the most attractive markets and Cresco Labs’ success in execution and incredibly popular brands, we will together create the most important — and the most investable — company in cannabis. Getting to know Charlie, his team, and the culture at Cresco Labs has given me a high level of confidence in the ability to successfully integrate Columbia Care and maximize the tremendous value of the combined footprint.” Per Marketwatch, “shares of Cresco Labs fell 6%, while Columbia Care stock rose 1.3%” following the announcement of the deal on Wednesday.

The still-burgeoning cannabis industry in the United States is already lucrative, but some market analysts have indicated that mergers like this one will be necessary for companies to maximize profitability.

Owen Bennett, an analyst with Jeffries, told Marketwatch that he gives Cresco a “buy” rating.

“We see the combination creating a clear industry leader,” Bennett said. “The combined company will have scale across most key states, industry leading brands and wholesale across these states, and much improved margin profile.”

In creating the largest multi-state cannabis operator, the merger gives Cresco “the largest pro-forma revenue in cannabis today at over $1.4 billion,” the company said.

The company said it will also now have more than 130 retail stores across 18 different markets, making it the second largest retail footprint in the industry.

And the company will now have the top share position in four markets –– Illinois, Pennsylvania, Colorado and Virginia –– the second largest share in Massachusetts and a “pathway to a top-3 position” in New York, New Jersey and Florida.

“The combined company will have a meaningful presence in today’s most influential markets,” the company said in its press release on Wednesday, “and those with the biggest tailwinds for growth and adult use upside including”: New York, New Jersey, Virginia, Pennsylvania, Ohio, Maryland and Florida.

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