Yesterday morning, it was announced that Cresco Labs (CSE: CL) is entering Florida with its acquisition of Bluma Wellness (CSE: BWEL.u) in an all-share transaction. The transaction will see shareholders receive 0.0859 Cresco Labs share for every Bluma share held at the time of closing. The transaction valued Bluma at U$213 million. Bluma’s shares jumped as high as +30% on the day but ended up 13.5% at $1.01.
Cresco Labs currently has 14 analysts covering the company with a weighted 12-month price target of C$18.20. This is up from the average before the results, which was C$16.49. Three analysts have strong buys, 11 analysts have buy ratings, and one analyst has a hold rating.
Stifel-GMP’s analyst Andrew Partheniou raised their 12-month price target on Cresco Labs from C$20 to C$21.50 off the back of this acquisition. He sees this acquisition as an overall positive, even though Cresco Labs offered a premium valuation for their entry. He justifies the raise by stating, “we note the attractiveness of the FL market matched with the strong base of BWEL’s business, CL’s expertise in large and rapid production expansions and its more favourable access to capital.”
Partheniou estimates Bluma’s market share to be 2% and their revenue run rate to be between U$25-U$28 million based on the fourth-quarter sales volume being similar in size to their third quarter. This would put the acquisition at 8x last quarter annualized. He also speaks very highly of Bluma, and writes, “However, due to the company’s reputation for premium flower, its stores impressively stand as the 2nd most productive in the state for flower and 4th overall as of Q4/20. “
Management has indicated that they expect Florida will be added to its core portfolio and that it could be another focus market. Bluma had outlined for an additional 120,000 sq feet of production expansion, but Partheniou writes, “we believe a much larger expansion could be possible and necessary to effectively compete against its more mature peers in the state that have 4-5x BWEL’s sales volumes (ex. TRUL).”
The last thing Partheniou writes about is that Cresco will most likely come and right Bluma’s recent wrongs. In their third-quarter financials, Bluma had to write off a significant portion of inventory/biological assets, roughly 25%. The company also guided for a slower retail store rollout and had their COO resign. He believes that there could be some production issues related to the facility that came online in April 2020. He adds, “we believe there may be knowledge synergies to be capitalized on, which could also result in a leaner operating profile, in our view.”
Information for this briefing was found via Sedar and Refinitiv. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.