Canopy Growth Acreage Holdings Deal Too Good to Be True?

Canopy Growth Corporation (TSX:WEED), one of the Canadian marijuana stocks, said it will acquire Acreage Holdings, Inc. (CSE:ACGR.U) once cannabis becomes federally legal in the U.S.

SmallCapPower| April 22, 2019: Canopy Growth Corporation (TSX:WEED) (NYSE:CGC), one of the Canadian cannabis stocks, Thursday announced that it has purchased the rights to acquire 100% of the shares of Acreage Holdings, Inc. (CSE:ACGR.U), once the production and sale of cannabis becomes federally legal in the United States. Under the terms of the arrangement agreement, Acreage Holders will receive an immediate payment of US$300 million plus 0.5818 of a common share of Canopy Growth for each Acreage Subordinate Voting Share held upon the exercise of the Right. The transaction is valued at approximately US$3.4 billion on a fully-diluted basis.

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The deal would mark the biggest cross border cannabis merger between Canada and the U.S.

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Canopy Growth is acquiring the rights because if it bought Acreage directly it would threaten Canopy’s listing on the Toronto Stock Exchange (TSX) and potentially its U.S. listing. TSX prohibits companies from investing in businesses deemed illegal.

A lot could change in the cannabis landscape, however, before cannabis become legal federally in the United States, which could be three or four years away by some estimates. If the terms are not satisfied or waived within 90 months from the payment of the Up-Front Cash Premium following the federal legalization of cannabis in the United States, the agreement will be terminated. The agreement includes a termination fee in the amount of US$150 million payable by Acreage in the event that the transaction is terminated in certain circumstances.

In addition to the recently legalized recreational market in Canada, many Canadian cannabis companies are also looking at the large recreational market in the U.S. Although illegal at the federal level, many states have legalized recreational or medicinal cannabis.

Acreage Holdings is one of the largest U.S.-based cannabis firms, having cultivation, processing and dispensing licenses or agreements with holders in 19 states as well as managing a chain of retail stores called The Botanist. The acquisition of Acreage, whose board includes former House Speaker John Boehner, former Massachusetts Gov. Bill Weld and former Canadian Prime Minister Brian Mulroney, would be accretive for Canopy, one of the largest players in the rapidly-growing global cannabis industry. The deal would help Canopy penetrate the U.S. market, while helping Acreage to grow further. Canopy Growth also has a license to grow hemp in New York State.

Following the announcement, shares of Canopy Growth climbed more than 4% to close at C$59.64 on the TSX Thursday. Canopy Growth is one of the leading diversified cannabis and hemp companies, offering a variety of cannabis in different forms such as dried, oil and Softgel capsule. Canopy Growth stock currently trades at a market capitalization of C$20.9 billion with a price-to-book multiple of 2.6x.

Disclosure: Neither the author nor his family own shares in any of the companies mentioned above.

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