Canopy Buys Acreage for $3.4 Billion in Bet on U.S. Market

(Bloomberg) -- Canopy Growth Corp. is making a big bet on weed legalization in the U.S.

Canopy, which was sitting on a pile of cash after a high-profile investment last year from alcohol giant Constellation Brands Inc., has agreed to buy the New York-based marijuana company Acreage Holdings Inc. for $3.4 billion in a cross-border deal that may usher in wave of consolidation in the burgeoning industry.

But for Canopy, the world’s most valuable pot company, there’s one major contingency: the deal by the Canadian firm hinges on the U.S. legalizing weed at the federal level, a thorny political issue that is by no means assured.

So far, Canada has been at the center of banking and merger activity in the weed business because the drug is federally legal there. But the market is already bigger in the U.S. despite federal prohibition. That’s put pressure on the Canadian companies to find a way into the massive American market, according to Ken Shea, an analyst at Bloomberg Intelligence.

“They know the U.S. is the biggest prize of all,” he said.

Canopy Rallies

Canopy’s shares gained as much as 12 percent, while Acreage added as much as 21 percent before declining 2 percent to C$22.99 at 10:27 a.m. in Toronto. That’s well below the offer price of about C$36 a share, reflecting the risk that the deal won’t get done.

Canopy won’t have an active say in Acreage’s operations until the U.S. legalizes pot at the federal level.

“Our right to acquire Acreage secures our entrance strategy into the United States as soon as a federally permissible pathway exists,” Canopy Chief Executive Officer Bruce Linton said in a statement. “By combining Acreage’s management team, licenses and assets with Canopy Growth’s intellectual property and brands, there will be tremendous value creation for both companies’ shareholders.”

Canopy will initially pay $300 million in cash to shareholders of Acreage, the companies said in a release Thursday. Shareholders will receive a further 0.5818 of a Canopy share when cannabis becomes legal in the U.S., representing a 42 percent premium over Acreage’s 30-day average price.

Boehner Link

Acreage, which boasts former U.S. House Speaker John Boehner and former Canadian Prime Minister Brian Mulroney as directors, will also have access to Canopy’s pot brands like Tweed and Tokyo Smoke and other intellectual property.

If weed isn’t legalized federally in the U.S. in the next 90 months, or 7.5 years, the deal can be terminated, according to the statement. That means that Canopy and Acreage are betting the marijuana prohibition will end in the U.S. by 2027.

Acreage went public on the Canadian Securities Exchange in November and is now among the largest U.S.-based pot firms with a market value of about $2.6 billion. It has cultivation, processing and dispensing licenses or agreements with holders in 19 states and manages a chain of retail stores called the Botanist.

“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,” Acreage CEO Kevin Murphy said in the statement. He added that “a confluence of factors are making it much more difficult for a multi-state operator to achieve its full potential,” pointing to the difficulties of operating in a federally illegal market.

Constellation Investment

Canopy has been looking for an entry point into the U.S. pot market but is restricted by its listings on the Toronto Stock Exchange and the New York Stock Exchange, both of which prohibit trading by companies that are violating U.S. federal law. Canopy is also restricted by its high-profile investment from Constellation Brands, the Victor, New York-based alcohol giant that makes Corona beer.

Canopy said Thursday it and Constellation Brands will extend the terms of certain warrants and other rights as part of the arrangement. If completed, the Acreage deal means Constellation would dilute Constellation’s roughly 37 percent ownership stake, but the alcohol giant can now buy Canopy shares on the open market, giving it a path to take majority control if it wants, according to a Constellation spokesman. Constellation rose 2.2 percent to $196.82.

For Constellation, legalization is only a matter of time.

“We think it’s inevitable, but you can’t predict the timing," said Michael McGrew, a spokesman.

The transaction is subject to the approval of shareholders of both companies. Greenhill & Co. Canada Ltd. acted as financial adviser to Canopy while Cassels Brock & Blackwell LLP and Paul Hastings LLP provided legal advice. Canaccord Genuity Corp. provided financial advice to Acreage while DLA Piper and Cozen O’Connor acted as legal advisers. INFOR Financial Inc. provided financial advice to Acreage’s special committee.

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