Canopy plans to acquire Acreage Holdings in a deal worth US$3.4 billion that is only applicable once cannabis becomes legal in the US.
On Thursday (April 18), the two cannabis firms confirmed an agreement that grants Canopy an acquisition option for Acreage when cannabis becomes federally legal in the US.
If approved by shareholders and if the option is exercised, Canopy will make a payment to Acreage shareholders of US$300 million, or around US$2.55 per Acreage share.
If the deal goes through, Acreage holders will get 0.5818 of a Canopy common share per Acreage share that they own. The two firms are valuing the transaction at approximately US$3.4 billion, indicating a premium of 41.7 percent over a 30 day average price as of Tuesday’s (April 16) close.
A termination fee of US$150 million has been included, payable by Acreage Holdings.
It is no secret that Canadian firms have been vying for an entry point into the coveted US market. This represents one of the first clear steps a Canadian leading cannabis producer has taken to enter the US.
By way of this unique arrangement, Canopy is sidestepping potential delistings in New York and Toronto. The standards of the exchanges Canopy lists on demand that no company directly operate in the still federally illegal US cannabis market.
Bruce Linton, co-CEO of the Canadian firm, told BNN Bloomberg that this deal was vetted by exchange regulators and will not provoke any challenges from the New York and Toronto stock exchanges.
Marijuana remains a scheduled substance at a federal level in the US. However, the introduction of legalization programs in several states has opened the doors to the rise of multi-state operators (MSOs).
These firms operate in the US with assets across the country in legal cannabis jurisdictions. Linton added that agreements have been discussed with six other undisclosed US companies.
The executive guesses that fellow Canadian firms will follow the same structure put forward by this agreement.
Kevin Murphy, CEO and chairman of Acreage Holdings, hinted that the deal represents a way to support his company at a time when the ramp up for MSOs is proving to be more challenging than expected.
“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,” Murphy said in a press release.
Acreage held a market value of US$963.14 million as of Thursday.
Shares of Canopy and Acreage rose when the deal was first rumored on Wednesday (April 17) and then confirmed on Thursday.
Canopy’s stock in New York closed at a price of US$44.85, representing a 3.99 percent increase for the day. During after hours trading the company saw a marginal increase of 0.65 percent.
Shares of the Canadian firm in Toronto also rose 4.43 percent to finish the day with a price of C$59.64.
Acreage shares ended Thursday’s trading session with a marginal drop of 0.62 percent for a price of US$22.35.
This agreement also highlights the differences in working capital available to Canadian companies compared to MSOs.
American companies don’t have access to the same financing options available to Canadian players. While MSOs have gained ground in the public markets thanks to a flood of listings in Canada, the difference in operating capital remains substantial between US and Canadian operations.
Murphy said if the option to acquire is exercised, his company will get access to Canopy’s “deep resources,” including its financial injection from alcohol producer Constellation Brands (NYSE:STZ).
In a previous interview with the Investing News Network, Greg Taylor, chief investment officer of Purpose Investments, speculated that the pressure to enter the US market for Canadian players could even lead to listing changes for companies.
As the US market grows and the appetite for investors migrates south of the border, Taylor said he could see a debate as to why a leading Canadian firm would want to de-list from a TMX Group (TSX:X) exchange in favor for one that allows US operations.
“A lot of people going back a year really thought that the Canadian companies would have two or three years to get up and running in the Canadian market,” he said.
Taylor added that the market has been caught off guard with how quickly these MSOs have gone from “afterthoughts” to established competing firms.
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Securities Disclosure: I, Bryan Mc Govern, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: Acreage Holdings is a client of the Investing News Network. This article is not paid-for content.