Acreage Will Use Canopy’s Clout to Do More Deals, CEO Says
(Bloomberg) -- Acreage Holdings Inc. plans to use its pending acquisition by Canopy Growth Corp. to bulk up in the U.S. even before the deal closes, using the clout and spending power it’s gained to dominate an accelerating cannabis land grab.
“Since announcing this deal, we’ve had a number of folks come to us and say, ‘We had contemplated a sale of our business, we had entertained a number of partners, and we would now like to redirect our efforts towards you and align with you guys,’” Acreage Chief Executive Officer Kevin Murphy said in a phone interview Monday.
Canopy’s $3.4 billion acquisition of Acreage, announced Thursday, is contingent on cannabis becoming legal at the federal level in the U.S. While New York-based Acreage will receive $300 million in cash up front, most of the purchase price will be paid in Canopy shares if and when U.S. laws change. Canopy, the world’s largest pot company by market value, has gained about 75 percent this year and its stock is significantly more liquid than Acreage’s.
In the meantime, Acreage can issue up to 58 million subordinate voting shares at an implied valuation of $1.4 billion based on the deal’s exchange ratio of 0.5818 of a Canopy share for each Acreage share, Murphy said.
The company can use that stock to “go out and acquire other companies in the U.S. and they in turn know that they will receive their share of Canopy when we can complete our merger,” he said.
This could give Acreage an advantage over many of its U.S.-focused cannabis competitors, which are currently fighting for scale in the world’s largest pot market, estimated to be worth $22 billion by 2022.
“This transaction should boost Acreage’s ability to consolidate the U.S. market,” GMP Securities analyst Martin Landry wrote in a note published Monday. “When Canopy officially takes ownership of Acreage, it could be much larger than currently.”
Canopy and Acreage both said they have no intention of changing the purchase price if Acreage bulks up in the interim.
The deal’s closing remains highly uncertain as it depends on the resolution of pot’s legal status in the U.S., something that’s become a thorny political issue. The deal can be terminated in 90 months if pot isn’t fully legalized.
18 Months Away
Murphy expressed optimism that cannabis will be federally permissible within 18 months. The passage of the STATES Act, which would free legal states from the threat of federal prosecution, would probably be enough, said Murphy and Canopy CEO Bruce Linton. Even the passage of the SAFE Banking Act could be enough if it pushes the stock exchanges to change their rules, Linton added. Currently, Canopy is restricted by its listings on the Toronto Stock Exchange and the New York Stock Exchange, both of which prohibit companies that are violating U.S. federal law.
The pending deal is also making Acreage much more appealing to investors, according to Linton, who said he had three calls from “substantial” firms asking about the deal on Monday morning alone.
“I think what you’re going to find is that really substantial pools of capital want to put cash to work with Kevin and his team at very normal-course, debt-like rates and/or do private placements,” Linton said. “That’s just because they can see that it’s a larger and more certain outcome because we work together.”
Still, existing Acreage shareholders seem uncertain about the deal’s prospects. Shares fell 3.9 percent Thursday and were down a further 3.9 percent to $21.33 in Toronto Tuesday, well below the current value of the cash and stock deal of $30.13 per share.
Murphy said he now has to go out to convince investors that the deal will get done.
The deal is a positive for Canopy but the benefits are less certain for Acreage, said Andrew Kessner, analyst at William O’Neil & Co.
Canopy “locks in a price for an asset that will almost certainly appreciate upon any federal legalization measures, while also gaining the ability to establish its brands in the U.S. immediately,” Kessner wrote. However, it’s “more of a mixed bag for Acreage,” which won’t immediately get a liquidity or capital boost. Kessner expects Acreage shares to trade below the conversion ratio “indefinitely.”
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