Canopy re-engineers Acreage deal during tough times for pot M&A
Canopy Growth Corp. and Acreage Holdings Inc. agreed to alter the terms of their merger agreement, joining a growing list of cannabis deals to be overhauled as the industry grapples with slowing growth and legal roadblocks.
Canopy will provide Acreage shareholders with an upfront cash payment of US$37.5 million under the revised terms, adding to the previously announced Us$300-million payment.
Canopy will also loan Acreage up to US$100 million to fund its U.S. hemp unit and create a new class of shares, the firms said Thursday in a statement.
The re-engineering of an already complex deal comes as the industry struggles to keep pace with growth expectations and overcome the added challenge of pandemic-related economic uncertainty. Companies have sought to consolidate to survive as banks and institutional investors remain unable to throw U.S. companies a lifeline because their product isn’t federally legal.
A number of pot deals, including Curaleaf ’s effort to buy Grassroots, have had to be altered amid the turmoil. Others have been scrapped entirely. Adding to the obstacles, some mergers have been delayed by antitrust probes now linked to Attorney General William Barr.
Kevin Murphy, who has stepped down as Acreage chief executive Thursday and remains the company’s chairman, acknowledged that many pot deals have come undone lately but said this is unlike others. Instead, he said this is about capitalizing on a market shift in the industry toward a new range of products based on hemp, rather than Thc-containing marijuana.
“This is really more of our re-energizing our relationship,” Murphy said in a phone interview.
“It’s not just about the change in exchange ratio, it’s about what we can garner from them, and what they can expect from us.”
The original deal, signed in April 2019, is set to close on a unique trigger: federal legalization of cannabis in the U.S. It was designed to give Canada-based Canopy control of one of the largest multistate players in the more lucrative U.S. market, without triggering legal concerns caused by the fact that cannabis isn’t federally legal. Since it was announced, shares of Acreage have fallen around 87 per cent and the U.S. shares of Canopy are down about 62 per cent.
The new terms strengthen Canopy’s strategy to enter the U.S. market, reduce potential share dilution upon U.S. federal pot legalization and also “provides Acreage a needed financial lifeline in a more shareholder-friendly way,” said Bloomberg Intelligence analyst Kenneth Shea.
But it’s also a sign of how changing fortunes combined with an unclear timeline for legalization can turn deals on their heads.
The amendment is “not a bullish signal,” wrote Jefferies analyst Owen Bennett in a Thursday research note. Because Canopy is restricted to lending Acreage money for hemp CBD operations that are federally legal, it raises the question of whether all of Acreage’s cash needs will be met, he said.
“While terms are more favourable, we believe this is a reflection of the struggles facing Acreage at present and its ability to continue as a going concern,” Bennett said.