Canopy Growth signs deal to purchase Acreage Holdings
The catch on the $3.4B transaction is pot must become legal across the United States
Canopy Growth Corp. has struck a deal to buy U.S. company Acreage Holdings Inc. for $3.4 billion (U.S.), but only if cannabis becomes federally legal in the United States.
The Smiths Falls-based company on Thursday announced its plans to create a “global cannabis powerhouse” and outlined a complex transaction which would give Canopy a foothold in the massive, lucrative U.S. market.
Under the cash-and-stock deal, Canopy would acquire 100 per cent of the shares of the New York-based multistate cannabis operator, contingent upon federal legalization of cannabis production and sale south of the border.
“Our right to acquire Acreage secures our entrance strategy into the United States as soon as a federally permissible pathway exists,” Canopy’s chair and cochief executive, Bruce Linton, said in a statement.
“By combining Acreage’s management team, licences and assets with Canopy Growth’s intellectual property and brands, there will be tremendous value creation for both companies’ shareholders.”
While cannabis is legal for medical and recreational purposes in several U.S. states, it remains illegal at the federal level and is considered a Schedule1drug. In turn, Canadian cannabis companies with U.S. dealings cannot list on the Toronto Stock Exchange and U.S. pot stocks cannot list on U.S. exchanges.
However, the political climate south of the border is becoming more receptive to cannabis.
Earlier this month, the bipartisan STATES Act — which would amend the Controlled Substances Act and could effectively make cannabis federally legal in states where recreational consumption is legal — was reintroduced in Congress.
Federal legalization of pot in the U.S.
would open the door for Canadian companies listed on the TSX to tap the large market.
The U.S. cannabis market including illicit sales is estimated to be worth $35 billion to $50 billion, roughly10 times the size of Canada’s market, said Piper Jaffray & Co. analyst Michael Lavery.
The acquisition announced Thursday is an “important first step for Canopy to become a leader” in the legal U.S. cannabis market, he added.
“By acquiring Acreage, Canopy would obtain U.S. licences, a key barrier to entry … We believe Canopy’s global footprint and Acreage’s footprint in the U.S. should position the company for sustainable growth momentum,” Lavery said in a note to clients.
It is unknown when the U.S. may potentially legalize cannabis, but it is estimated to occur within the next two to five years, or possibly sooner, he added.
The companies said Thursday the agreement is terminated if U.S. federal legalization of cannabis does not occur within 90 months, or 7.5 years.
Shares of Canopy rose as much as 11.8 per cent on the Toronto Stock Exchange to $63.85, but was trading at $59.64 by market close. Acreage’s stock on the Canadian Securities Exchange was down roughly 0.14 per cent to $22.35 at close.
Acreage — whose board of directors includes former prime minister Brian Mulroney and former Speaker of the U.S. House of Representatives John Boehner — owns licences to operate or has management services agreements in place with licence holders in 20 states, including pending acquisitions.
The companies said Thursday they will also execute a licensing agreement granting Acreage access to Canopy Growth’s brands including Tweed and Tokyo Smoke, along with other intellectual property.
As part of the deal, which is subject to regulatory and shareholder approvals, Acreage shareholders will receive an immediate payment of approximately $2.55 per subordinate voting share or $300 million.
Once cannabis becomes federally legal in the U.S. and Canopy exercises its right, it will pay an additional 0.5818 of a Canopy share for each Acreage subordinate voting share. This represents a premium of 41.7 per cent over the 30-day volume weighted average price of Acreage ending on April 16.
“Having access to Canopy Growth’s deep resources will enable us to innovate, develop and distribute quality cannabis brands across the U.S. and continue expanding our U.S. footprint,” said Acreage Holdings chief executive Kevin Murphy.