M&A Updates: Cresco Labs/Origin House To Merge In A Biggest Cannabis Deal So Far

by: Special Situation Investor

Cresco Labs is acquiring Origin House in an all stock merger.

Realm Therapeutics is a failed biopharma company, that trades at a nice discount to NAV.

So far, Lynas has rejected the unconditional bid from Wesfarmers.

Cresco Labs (OTCQX:CRLBF) - Origin House (OTCQX:ORHOF)

Spread: 11%

This is so far the biggest US cannabis deal yet and it also comes with all the risks and nuances of the industry. This deal has been widely covered in other SA articles, so it is worth checking them out. Canadian Origin House (C$750m) is being acquired by US based Cresco Labs for an all stock consideration of 0.8428 Cresco shares per each Origin share. Alongside regulatory consent the conditions require approval of two thirds of the target company's shareholders (meeting is planned in June). It seems that certain directors, management and other "significant shareholders" have entered into agreement to vote in favor of the transaction, however it is interesting that no exact numbers or names were given. So far most cannabis deals were successful, however as it is still a very young + inflated industry, moreover, the size adds additional risks here as well. Borrow is expensive, so in order to be profitable, this has to close shortly after the shareholder approval.

Realm Therapeutics (RLM)

Spread: 26%

Realm is a failed biopharma company that trades at a considerable discount to its NAV. Last, due to unfavorable results the company has cancelled its only two product candidates and this year it has already sold its remaining business, so currently RLM exists only as a shell (with a Nasdaq listing). NAV stands at $5.1/share, so given the current trading price which is just above $4/share, the discount is 26%. The company is undergoing a strategic review as has already received a few indications of interests from third parties, which might result in a takeover, however it is also possible that the cash will be used to acquire some new assets to develop. The main risk is that RLM will be merged into some value destroying business. Also, according to Nasdaq rules, RLM cannot remain on the exchange as a shell and therefore is expected to lose its listing in May. If the management won't do anything by that time, trading will have to move on to the pink sheets, which could negatively affect the liquidity. By the way, the fact that second largest shareholder has written the letter to the management and is apparently pushing for a tender offer at a price close to NAV makes this situation even more interesting.

Wesfarmers - Lynas (OTCPK:LYSCF)

Spread: 7% (to the rejected offer)

This is an interesting situation in Australia. Wesfarmers have presented an indicative non-binding offer to acquire rare earths miner Lynas (A$1.4bn). The consideration stands at A$2.25 and although it brings 45% premium to the pre-announcement and 37% to 60 day-average prices, is quite opportunistic given that it comes at a problematic time for Lynas. Large part of their business is done in Malaysia's Kuantan plant, which license expires this year and just a few weeks before the offer, the target company has received some tough conditions from the Malaysian government in regards to the renewal of the license. The major one is to remove all (450 tons) of the low risk radioactive waste by September 2019. So far, Lynas has rejected the offer and help from Wesfarmers and intends to tackle the problem on its own. Currently, it is hard to guess which way this situation will go and how likely it is that Wesfarmers will increase their offer, although they do seem very motivated to get their hands on Lynas now and there are some speculations that the whole thing was plotted by the buyer and Malaysian government. Besides that, this can very much be a shorting case also.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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