Cannabis Players React to Canopy Growth and Acreage Holdings Deal

- April 30th, 2019

An inside look at the recent $3.4 billion deal between Canopy Growth and US focused multi-state operator Acreage Holdings.

The cannabis industry is excited about the potential changes that could stem from the structure of a new deal between US and Canadian players.

Under the terms of the US$3.4 billion acquisition plan, announced on April 18, US focused multi-state operator (MSO) Acreage Holdings (CSE:ACGR.U,OTCQX:ACRGF) holders will get an initial payment of US$300 million from Canopy Growth (NYSE:CGC,TSX:WEED).

The agreement grants the Canadian firm the option to bring Acreage under its umbrella when cannabis becomes federally legal in the US.

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Following the confirmation of the deal, members of the space offered their reactions to the transaction and what it could mean for the marijuana business. Read on for insight from Acreage, plus views on the groundbreaking deal from industry participants.

Why did Acreage agree to this deal with Canopy?

Now that the market has cleared through some of the initial questions on the structure of the deal, the two marijuana companies have had to face more in-depth questions from players in the space about the long-term impact of this acquisition option.

“The volatility in the stock and the illiquidity of the stock has really kept (Acreage CEO Kevin Murphy) awake at night. That’s the thing he worries about most, the safety of his investors, and this gives him a floor,” Steve West, vice president of investor relations at Acreage, told the Investing News Network (INN).

West said that, thanks to the acquisition plan, shareholders of the company will gain improved liquidity, which he categorized as a goal for Murphy.

West told INN that MSOs struggle to raise capital due to market limitations on larger institutions. Marijuana remains an illegal substance at the federal level in the US.

US players operate in legal marijuana states, but in a federal sense these companies are illegal. Meanwhile, Canadian firms have become leaders of the global marijuana industry thanks to legalization efforts in the country and the platform that publicly traded licensed producers (LPs) have gained.

But when it comes to the public sector, the race now involves the MSOs, since the promise of a much larger US population base attracts investors to companies already operating in thriving markets.

This is where the advantage for large Canadian cannabis players becomes ineffective, as exchange regulations prohibit these companies from entering the US market.

As such, Canopy elected to partner up with Acreage in an attempt to get ahead of US legalization.

“One of the things (Murphy) has always talked about is whichever US company can get access to the cheapest capital wins,” said West. “If you can get access to cheap capital, you will win this race.”

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Alan Brochstein, cannabis analyst with 420 Investor, wrote that one of the main benefits for Acreage will be the capability to issue up to 58 million shares. “We expect that potential acquisition candidates will have more confidence in the equity of Acreage given that it will be tethered to Canopy,” he said.

West confirmed this strategy to INN, saying the cash generated by these new shares could be used to accelerate the expansion of the company.

Thanks to this rapid expansion, according to West, once Canopy can exercise its option, then it will get “an even bigger US player.”

Challenges for the MSO market coming up this year

As indicated by the agreement, Canopy will not be part of the immediate operations of Acreage.

Effectively, the two companies will continue to act separately from one another until the triggering mechanism for the acquisition comes into play.

Murphy said in a press release that the roadmap for MSOs is set to increase in difficulty.

“At the same time, a confluence of factors are making it much more difficult for a multi-state operator to achieve its full potential, including the enormous amount of cash required to scale,” he said.

Greg Taylor, chief investment officer of Purpose Investments, told INN that MSOs still face a fractured market that makes it difficult to successfully operate.

However, he anticipates that investors will expect results from these firms this year. “People are going to be watching the MSOs away from an acquisition mode, to more of an operating mode,” he said.

Taylor also serves as the portfolio manager for the Purpose Marijuana Opportunities Fund (NEO:MJJ), which holds exposure in the US cannabis space.

For his part, Kris Krane, president of MSO 4Front Holdings, told INN that a lot of MSOs have neglected the theme of “building a coherent operating platform” at the expense of growing portfolios.

He expects the challenge of connecting all operations to be significant for some MSO players.

Krane’s firm is set to complete a business combination with Cannex Capital Holdings (CSE:CNNX,OTCQX:CNXXF) and reach a public listing this year.

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Experts now expect to see deals done in a similar way

During a panel at the Arcview Investor Forum event in Vancouver on April 23, one marijuana analyst said this move represents a culmination for the road MSOs have been on.

“It speaks to validating this MSO model in terms of aggregating licenses and ultimately trying to get access to a US consumer,” said Graeme Kreindler, equity analyst with Eight Capital.

Thanks to the structure laid out by Canopy and Acreage, various parties expect to see more Canadian players pursuing similar arrangements.

Matt Bottomley, an equity analyst covering the marijuana space with Canaccord Genuity (TSX:CF,OTC Pink:CCORF), told the audience at the Arcview Investor Forum that Canadian firms are in need of growth since the Canadian market itself has a clear limit.

“I don’t know if anything is going to happen in the next three to six months, but I think that, if the floodgates open, or if it becomes a little more easy to enter into these types of transactions without having to get into convoluted options or warrants and all these things that are necessary right now, I think you would see almost every large-cap LP enter the US space,” Bottomley said.

If this prediction holds true and many Canadian players enter the US, Taylor told INN that he expects the MSO race to speed up with the influx of capital.

I think every Canadian company has to look at the US, and I think now that you have the framework and roadmap on how to do it, I think you’re going to see the big Canadian companies all try and pair up with a big US MSO,” he said.

When asked if this agreement positions Acreage as the top MSO in the public sector, Taylor said it is too soon to tell. The portfolio manager said the market has been waiting for the company to go out and conduct some splashy acquisitions rivaling those of its competitors.

Could entry from more established players speed US legalization?

Speaking at his kickoff address, Troy Dayton, CEO of Arcview Investor Group, said he has long expected to see similar deals as the end of federal prohibition nears.

The group advocates for legalization campaigns and updates its members on efforts across the US.

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Dayton said he expects to see many more announcements in the future, which could add pressure to changes at the federal level due to the potential entry of Fortune 500 companies.

Krane told INN that if entities such as hedge funds or pharmaceutical, alcohol or even tobacco companies follow in the footsteps of Canopy, there is more potential for talks with government officials.

“Some of these companies spend a lot of money on federal lobbying, and all of a sudden we got a reach in Congress and a reach among federal elected officials that we wouldn’t have had just as an industry alone without the participation of these more established players,” he said.

Industry raises questions on agreement

Following the confirmation of the agreement, some market players expressed doubt and general confusion about the deal.

At the same Arcview Investor Forum panel, Anna Serin, director of listings development with the Canadian Securities Exchange, told investors the deal is “very speculative.”

The executive for the Canadian exchange, which has become the listing house for the majority of the MSOs looking to raise capital due to exchange regulations in Canada, said shareholders are taking a chance with this agreement structure.

Serin said that from Canopy’s point of view it was necessary to go to the US given recent performance issues in the Canadian market and a valuation that demanded justification.

Krane told INN he is curious about the long-term protection for Acreage depending on the performance of the public market.

“The US$300 million that they get as part of the deal right now is obviously a big deal, and maybe that alone is worth it, but it felt like the deal has real downside protection for Canopy, but there is no upside protection for Acreage,” he said.

Krane reiterated that the initial payment from Canopy is a sum large enough to give Acreage a “massive advantage” that makes it worthwhile taking the upside risk.

Don’t forget to follow us @INN_Cannabis for real-time news updates!

Securities Disclosure: I, Bryan Mc Govern, hold no direct investment interest in any company mentioned in this article.

Editorial Disclosure: Acreage Holdings and Cannex Capital Holdings are clients of the Investing News Network. This article is not paid-for content.

Editor’s Note: This story was updated to correct a statement on the US$300 million payment from Canopy Growth to Acreage Holdings shareholders if an investor vote approves the transaction.

The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in contributed article. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.

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