Canopy Kicks Off Cross-Border Cannabis Consolidation

(Bloomberg) -- Cross-border cannabis consolidation has begun.

Canopy Growth Corp. announced Thursday that it’s buying Acreage Holdings Inc. in a $3.4 billion deal that keeps it onside with stock-exchange rules while giving it an entry point to the U.S. market the moment federal legalization occurs.

The deal is “the most complex M&A transaction completed in decades,” according to Jonathan Sherman and Jamie Litchen, partners at Cassels Brock & Blackwell LLP, the law firm that advised Canopy on the offer.

The caliber of Acreage’s board -- including former U.S. House Speaker John Boehner, former Canadian Prime Minister Brian Mulroney, and 2020 presidential candidate William Weld -- may actually help the companies speed up the legalization process, according to Cowen & Co. analyst Vivien Azer.

“These relationships will likely prove helpful in pushing for a change in U.S. laws surrounding cannabis, and in particular marijuana, which remains a Schedule I controlled substance,” Azer wrote.

She added that both Canopy and its largest investor, alcohol giant Constellation Brands Inc., have previously indicated that passage of the STATES Act would be enough for Canopy to enter the U.S., and that the deal was likely motivated by the reintroduction of the bill that would free legal states from the threat of federal prosecution.

Next Targets

This week, there will undoubtedly be plenty of investor speculation about who could be the next beneficiary of a similarly creative deal structure.

One possible target is iAnthus Capital Holdings Inc., which operates 21 dispensaries in 11 states, according to Seaport Global Securities analyst Brett Hundley. The company could be acquired for $8 a share or higher for a total takeout value of $1.5 billion, Hundley wrote.

However, he also cautioned that the U.S. government could throw a wrench into the Canopy-Acreage deal because of Constellation’s 37 percent stake in Canopy and the country’s strict alcohol regulations.

“Hypothetically, what is to stop an alcoholic beverages manufacturer like Constellation from co-locating product at retail dispensaries with cannabis products?” he asked. “We think that the U.S. government will look at this transaction from multiple angles.”

Aphria Expiry

One cross-border deal that’s almost certainly not getting done is Green Growth Brands Inc.’s hostile bid for Aphria Inc.

The offer will now expire on Thursday after the companies agreed to bump up the expiry date from May 9. If enough shareholders don’t tender to the bid by then -- and it’s highly unlikely they will, since the offer is about 40 percent below Aphria’s current share price -- the ill-fated deal will officially be dead.

Instead, the two companies are discussing potential commercial arrangements that could give Aphria an indirect route into the U.S. through Green Growth’s legal hemp-derived CBD products.

“We have a CBD business that really was an afterthought a year ago and it’s turning out to be a monster, and that’s very attractive to any Canadian LP,” Green Growth Chief Executive Peter Horvath said in an interview last week. “They’re all looking for ways to enter the U.S. market and they can’t through cannabis but they can through CBD.”

Any deal could work both ways, as Aphria and other Canadian pot producers have established footholds in international markets like Europe, Australia and Latin America.

“We’re not global, we’re focused on the U.S., but through partners we could be global and bring our CBD product elsewhere,” Horvath said.

As for why Green Growth gave up on the deal with Aphria, Horvath was honest: “It’s just out of our reach.”

Upcoming Events This Week

TUESDAY 4/23

  • The Arcview Group will host an international investor forum in Vancouver through April 25
  • Harvest Health & Recreation Inc. will report fourth-quarter earnings with an analyst call scheduled for 8 a.m. New York time
  • CannaGather will host its 2019 awards ceremony featuring Canopy CEO Bruce Linton as keynote speaker

WEDNESDAY 4/24

  • Tilray Inc. will officially open its European campus in Cantanhede, Portugal
  • TerrAscend Corp. will release fourth-quarter results followed by an investor day on April 25

THURSDAY 4/25

  • The CannaMexico World Summit will be held in San Cristobal, Guanajuato, through April 26
  • Tobacco company Altria Group Inc., which holds a 45 percent stake in Cronos Group Inc., reports first-quarter results with a call at 9 a.m. New York time
  • Green Growth Brands Inc.’s takeover offer for Aphria Inc. expires
  • The O’Cannabiz conference and expo runs in Toronto through April 27

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