Canopy strikes groundbreaking cannabis-sector deal to buy Acreage for $3.4 billion

Canopy Growth CEO Bruce Linton (Photo by Justin Tang)

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Marijuana industry leader Canopy Growth has struck a deal to buy New York-based Acreage Holdings in what would be the first major Canada-U.S. cannabis transaction – but the purchase won’t be executed until the U.S. government removes federal prohibition.

The combination of the two companies would create a North American cannabis juggernaut.

The move is sure to drive up valuations across the American marijuana sector, according to analysts.

To stay onside stock market rules that bar Canopy from investing in businesses that break federal law, Canopy would not immediately purchase Acreage outright.

The deal announced Thursday gives Canopy the right to acquire all of Acreage’s shares when cannabis production and sale becomes legal at a national level in the United States.

Under the terms of the agreement, Acreage will receive an immediate payment of $300 million.

In addition, if exercised, holders of Acreage’s subordinate voting shares will receive 0.5818 per Canopy common share – valuing the deal at $3.4 billion, which would make it the richest M&A transaction in the cannabis industry.

Acreage also gains access to Canopy brands such as Tweed and Tokyo Smoke, plus other intellectual property.

That blueprint is not without precedent.

Canopy has a similar deal with Slang Worldwide – a brand and distribution company with operations in the United States – to acquire a stake via 31.6 million warrants, exercisable if the U.S. legalizes cannabis federally.

Land grab

The land grab for ownership of license assets in key American markets will accelerate, experts say, not just for Canadian cannabis companies looking to take advantage of their attractive cost of capital but for businesses across multiple sectors.

“This transaction will light a fire under executives in every market that is impacted by cannabis, including alcohol, tobacco and consumer products,” said Max Mausner, senior analyst at Vantage Asset Management in Toronto.

He said entering the U.S. market will only get more expensive.

“Limited license frameworks and tight state-level regulatory control of cannabis production and distribution means moats are being dug today by the early movers such as Acreage, Cresco or Curaleaf – moats that will only become more expensive to cross as the incumbents build brands and expand their national market share.”

International focus

Canopy has been on the hunt for international acquisitions for months.

The Ontario company is flush with cash after global liquor firm Constellation Brands injected an industry-record 5 billion Canadian dollars ($3.8 billion) in the Canadian company last summer.

At the time, Canopy CEO Bruce Linton said the deal would be “rocket fuel” for the firm’s international expansion.

The reported deal with Acreage comes in the wake of Canopy’s move to enter the U.S. hemp industry.

Canopy laid out plans in late 2018 to invest up to $150 million in New York state in hemp.

A month earlier, Canopy acquired Colorado-based hemp company Ebbu for CA$25 million in cash and another CA$100 million conditional on scientific-related milestones.

Canadian cannabis companies – including Canopy – are prepared to pour billions into international expansion strategies, branching away from what is a relatively small Canadian market.

Ontario-based cannabis firm CannTrust is also planning to enter the U.S. market.

“We are in active conversation on the hemp side in the U.S. trying to find trusted partners we can work with. Those discussions are in relatively early stages,” CEO Peter Aceto said during a recent conference call.

In 2018, 140 U.S. cannabis companies were targets of mergers and acquisitions, a substantial increase over the previous year’s 86.

Helping to fuel the acquisition binge, Canadian cannabis firms raised a record CA$11.96 billion in 2018.

Two of the largest cannabis M&As thus far include:

  • Aurora Cannabis acquired rival cannabis producer MedReleaf one year ago for CA$3.2 billion.
  • More recently, Arizona-based Harvest Health & Recreation reached an agreement to buy Chicago’s Verano Holdings for $850 million.

Canopy’s shares trade on the New York Stock Exchange under the ticker symbol CGC and on the Toronto Stock Exchange as WEED. Acreage shares trade in the Canadian Securities Exchange as ACRG.U.

Matt Lamers can be reached at mattl@mjbizdaily.com

4 comments on “Canopy strikes groundbreaking cannabis-sector deal to buy Acreage for $3.4 billion
  1. mike on

    and regular citizen growers thought they had a chance. that is why ca gov has made licensing almost or even impossible for little guys. ca regs are the same as requirements for multi million dollar public works highway projects. these big guys must see profits untold or are just setting themselves for big tax write offs like trump does leaving the taxpayers to cover avoided taxes. but no urgency for medical that really hurts those that need it for health not just loaded.

    Reply
  2. david on

    So the volume of pot smokers may go up a little. The new laws did not change anything to effect that. Yet it appears that the new retailers may go up ten fold. All financed by suckers buying these stocks with only a business plan to suffice as due diligence.
    In California, less cannabis is sold in dispensaries than ever before, and it appears to be getting worse. The consumers of cannabis seem to be quite happy to get their weed from the real cannabis market not dispensaries that now have the stench of corporate greed.
    Even when the market crashes the CEO’s and other corporate criminals will have made their millions while the stock holders are left with zip. This is Gavin Newsome’s baby, it will follow him all the way to the White House. When California’s market crashes, it will have ripple effects all across the country.
    Fix it now Gavin, or pay later. Dissolve the BCC and the pay to play system, it is not the prop 64 people voted for. All we got was thrown under the bus and a new Drug Overlord Cartel.

    Reply
  3. Rex D Stock on

    More stock manipulation… “When Federal Cannabis is Approved”… Casino gaming to this day is still illegal at the Federal Level. And so it will remain the same in the cannabis world. Pure BS all these contingency pro forma proclamations.

    Reply
  4. Boom and Busted on

    One of the saddest parts of legalization in CA is watching large companies advocate for policies that create high barriers to entry for small businesses in the name of protecting people’s health or safety. Why are only the largest companies represented on “industry trade associations” and political advising committees? Why is it that a few major Canadian companies own such a large share of the California market? Unless CA acknowledges that the state has a vested interest in creating a diverse marketplace with equal access to markets and capital, the industry will be dominated by companies like Scotts Miracle Gro and Monsanto.

    Reply

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