Cannabis Weekly Round-Up: Big Value Drop for Canopy/Acreage Deal

- June 26th, 2020

Initially valued at a whopping US$3.4 billion, the transaction between the companies is now worth an estimated US$843 million.

In the cannabis space this week, two key players in the industry agreed to adjust a major deal that they first announced to investors last year.

Meanwhile, expert speakers at an online marijuana event discussed ongoing issues in the market, including where investors are directing attention and the slow path to federal legalization in the US.

Read on for a closer look at some of the biggest cannabis news over the last five days.

 

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Canopy/Acreage deal value drops to US$843 million

News hit on Thursday (April 25) that Canopy Growth (TSX:WEED,NYSE:CGC) and Acreage Holdings (CSE:ACRG.U,OTCQX:ACRGF) have amended the terms of a unique deal that gives Canopy the option to acquire Acreage when cannabis becomes federally legal in the US.

The deal between the companies was first announced last April and was valued at a whopping US$3.4 billion. At the time, the arrangement was touted as a win for both parties — Canopy would eventually gain access to the US market, while Acreage would be able to draw on Canopy’s “deep pockets.”

This week’s announcement decreases the value of the transaction to US$843 million, according to BNN Bloomberg, a far cry from the original multibillion-dollar amount. According to the companies, the change was made partially due to current market conditions:

Considering the challenging economic environment and increasingly tighter and volatile financial market conditions, particularly for cannabis companies, Acreage determined that the New Arrangement represents the best available prospect that is compliant with the terms of the Arrangement Agreement to maximize potential value for Acreage shareholders.

Under the adjusted agreement, Canopy will make an upfront US$37.5 million payment to Acreage shareholders, which works out to about US$0.30 per existing share.

The arrangement will also see Acreage’s shares get split into fixed and floating classes — 70 percent of each existing Acreage share will be converted into a fixed share, with the remaining 30 percent converted into a floating share. Completion of the deal is still contingent on US federal legalization, and once it occurs Canopy will trade 0.3048 of a Canopy share for each Acreage fixed share; Canopy will also have the option to buy each floating Acreage share for a minimum of US$6.41.

Finally, Canopy will loan Acreage up to US$100 million to advance its hemp business.

Market watchers have had mixed reactions to the changes. Marijuana Business Daily quotes Cowen’s Vivien Azer as saying that it “significantly reduces potential dilution from the deal and provides some optionality.” The news outlet reported a less favorable reaction from Owen Bennett of Jefferies.

“Assuming Acreage can remain a going concern until such time as we reach federal legalization … Canopy faces guaranteed dilution from a business that, given its current problems and huge cost base, is only likely to add to the pressures currently being faced,” he said in a note. Acreage took a share price hit earlier this month when it announced a short-term $15 million loan with an interest rate of 60 percent.

For its part, Canopy has been in the news lately due to its turnaround strategy, which was announced in April. It also released its most recent quarterly results about a month ago, disappointing investors.

Key takeaways from Prohibition Partners LIVE

Many events in the cannabis space have gone online recently due to COVID-19 restrictions, and the latest was this week’s Prohibition Partners LIVE conference. The two day gathering touched on a number of key issues in the space, including changes in what investors want to see from companies.

On the whole, there was agreement that investors have matured and now prefer a simplified approach with a focus on cash flow — in fact, Alan Brochstein of 420 Investor and New Cannabis Ventures went as far as to say that investors will penalize companies whose business models are too complex.

Click here to skip to the Investing News Network’s overview of Prohibition Partners LIVE.

Aside from that, speakers at the web-based event discussed what’s happening with federal legalization in the US, a process that has ended up being much more slow and complicated than many market watchers had hoped. Brochstein suggested that for reforms to happen, the Democrats will probably need to control both the House and the Senate.

For his part, Narbe Alexandrian, CEO of cannabis investment firm Canopy Rivers (TSX:RIV,OTC Pink:CNPOF), believes that it will take two to five years for federal legalization to come to the country.

Cannabis company news

  • Aleafia Health (TSX:AH,OTCQX:ALEAF) and Aphria (TSX:APHA,NASDAQ:APHA) have entered into a settlement agreement for a dispute surrounding a wholesale cannabis supply agreement. As per a press release from Aleafia, its subsidiary Emblem Cannabis will receive total consideration of C$29.1 million from Aphria. The deal was signed in 2018 and canceled in 2019.
  • Aurora Cannabis (TSX:ACB,NYSE:ACB) shared an update on its corporate restructuring plan, which was announced this past February. Among other adjustments, the company said it has put a plan in place to close five facilities over the next quarters, a move that will impact about 700 employees; Aurora’s aim is to focus production on its larger-scale and more efficient sites.
  • Curaleaf Holdings (CSE:CURA,OTCQX:CURLF) signed an amended agreement for its acquisition of privately held GR Companies. The deal was first announced last year, and its value was pegged at US$875 million; now, like the Canopy/Acreage agreement, it has been downsized due to market conditions — in total, the acquisition is reportedly worth $700 million under the new terms. It is expected to close in the coming weeks, according to Curaleaf.
  • VIVO Cannabis (TSX:VIVO,OTCQX:VVCIF) entered into two deals with Shoppers Drug Mart, one for product supply and one for clinic services. The company will provide the store with branded medical cannabis products, as well as cannabis education services for patients.

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

Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article.

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