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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