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Report on Business Cannabis Professional Canada’s Origin House sells for $1.1B after thriving in California’s ‘open’ CPG market

  1. Cresco to buy Origin House for $1.1-billion
  2. Origin House operates largely in U.S. due to market opportunity
  3. CEO of Origin House to join Cresco’s executive team

Chicago-based Cresco Labs Inc. said on Monday it will buy Ottawa-based Origin House in what it called the biggest public company acquisition in the U.S. cannabis sector after the Canadian pot distributor established itself in California – where traditional branding is permitted.

Strict marketing regulations in Canada prevent cannabis companies here from using traditional branding techniques that facilitate easy recognition – and repeat purchases, in theory – by consumers. In the United States, recreational cannabis is legal in 10 states but remains illegal at the federal level.

Cresco will acquire Origin House (formerly CannaRoyalty Corp.), both of which trade on the Canadian Securities Exchange, for $1.1-billion, or $12.68 per Origin House share, the companies said.

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The purchase will combine Cresco, a vertically integrated and multi-state cannabis operator in the United States, with Origin House, a cannabis distributor that offers brand support services in California.

Origin House operates retailer 180 Smoke in Canada, which is included in Cresco’s purchase, but its larger distribution business takes place in California.

“I anticipated that Canada, even though it [cannabis] was legal, that over the long-term, Canada would be a difficult market, yet I was looking directly into the U.S. and watching the advent of very open markets that were based on consumer packaged goods principals,” said Marc Lustig, chairman and chief executive of Origin House.

“This government is smart. They understand the cannabis industry as an opportunity both economically and to address the black market, but to the extent that you don’t let branding happen then the consumer doesn’t have the full information set that they really require to make product choices.”

While the Canadian government did a “phenomenal” job legalizing cannabis, the restrictions placed on branding and the slowness of some provincial governments in rolling out their retail strategies have probably strengthened the black market’s foothold, Mr. Lustig said.

Market regulations in Canada were designed to keep legal weed out of the hands of minors. Along with a list of images and words that cannot be placed on products, labelling rules also require specific warnings that take up a significant portion of the packages and cause many products to look similar.

Canada’s restrictive product branding will have to change as the black market is still a strong alternative to legal purchases, Mr. Lustig said.

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“The black market is sapping too big of a chunk of an opportunity that the system was put in place to go after. This entire discussion is exactly why I wanted very little to do with Canada,” Mr. Lustig said.

"Anytime that there’s an arbitrage where a consumer can go and get better service, better quality, better prices from the black market, you’re not addressing the problem that the program was meant to address.”

Mr. Lustig will join the Cresco board of directors and senior executive management team in a role that has not yet been defined but will likely involve mergers and acquisitions, he said.

Origin House built a platform of cannabis brands and distribution in California, and Cresco’s presence in 10 other states offer the biggest footprint in the U.S. cannabis market by population, or “total addressable market,” Mr. Lustig said.

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