Just when a trend in the burgeoning marijuana sector—in this case the heated pace of deal making—has become easy to predict, along comes a new twist. And this one is big, to the tune of US$3.4 billion. Sector observers, as well as investors, will be closely watching this particular alliance for a variety of reasons.
Earlier this month, Canadian cannabis producer Canopy Growth (NYSE:CGC), (TO:WEED) signed a deal to acquire U.S. marijuana producer Acreage Holdings (OTC:ACRGF). It is the first such deal between two cannabis producers on opposite sides of the border. It also could be the foundation for a North American cannabis superpower.
Since the start of 2019, Canopy shares have skyrocketed, gaining almost 73% to make it the largest cannabis stock by market cap. The stock closed at US$49.10 on Friday.
The current deal could push the stock's value much higher...at some point. But right now it's most prudent to view this deal as an engagement with no precise date yet for the wedding. Champagne corks will only be popped when the U.S. federal government legalizes marijuana, because that's the date when this marriage can actually be consummated.
This contingency is necessary since under Canadian regulations, companies listed on the Toronto Stock Exchange cannot own assets in locations where marijuana isn't legal. And in the U.S., this refers to federal laws, even though certain individual state laws have already legalized cannabis.
Still, it's interesting to note that observers are only speaking of ‘when’ rather than ‘if’ the U.S. government formally recognizes the state-by-state movement toward legalization of marijuana.
According to the terms of the agreement, Canopy Growth will make an initial payment of US$300 million as soon as Acreage Holding shareholders approve the deal. Then, when Canopy Growth goes ahead with the takeover, Acreage shareholders will receive a little more than half the value of a Canopy share—0.5818 of a share to be exact—for each Acreage share they hold.
Canopy Growth chairman and CEO Bruce Linton summed up the significance of the deal:
“Our right to acquire Acreage secures our entrance strategy into the United States as soon as a federally-permissible pathway exists.”
Gaining that pathway into the world’s largest marijuana market is a colossal move for Canopy. Other cannabis companies looking to gain a foothold in the U.S. have so far only sought to partner with firms that have operations in states that have legalized the product. Canopy will be able to leverage its expanding operation in not only the growing of marijuana space, but in the research and development of pharmaceutical cannabis and oils and edible products.
“When the right is exercised, 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,” Linton explained. “At the same time, a confluence of factors is making it much more difficult for a multi-state operator to achieve its full potential, including the enormous amount of cash required to scale.”
With the Acreage deal, Canopy will be active in 20 states, a market that has been valued at upwards of US$17 billion.
Acreage’s other high-profile Canadian connection
The plan for Canopy Growth to acquire New York-based Acreage Holding is not the only Canadian connection for the U.S. company. Among its high-profile board or director members is former Canadian prime minister Brian Mulroney. Many have interpreted Mulroney’s position on Acreage's board, which also includes former speaker of the U.S. House of Representatives John Boehner, as a sign that legalization in the U.S. is a bankable eventuality.
For those investors keeping count, however, this latest deal, although big, is not Canopy Growth’s biggest. Last November, it signed a $US4 billion deal with Constellation Brands (NYSE:STZ), the U.S.-based international beer and wine producer behind iconic brands that include Corona and Robert Mondavi. This deal gave Constellation a 37-percent stake in the Smith Fall, Ont.-based company.
And the deals keep piling up. In March alone, Canopy announced three strategic agreements: the acquisition of U.S. hemp producer AgriNextUSA, a multi-year agreement with British Columbia-based HollWeed North Cannabis, and an extension of its partnership with OG DNA Genetics.
The AgriNextUSA deal was struck on the heels of the passage of the U.S. Farm Bill, which legalized hemp. The deal calls for Canopy to invest between US$100 million and US$150 million in AgriNextUSA’s New York hemp operations.
Canopy's multi-year agreement with HollyWeed North Cannabis is to process dried cannabis in a facility in Victoria BC to be used for high-quality oil and resin. This will help Canopy better meet the demand for new CDB-infused edible products, expected to hit Canadian markets later this year when they are legalized.
During March, Canopy also trumpeted its partnership extension with OG DNA Genetics, a globally recognized cannabis brand, to bring that company’s reputed genetics technology into the European market. Details of the expansion plan were not disclosed, but the partnership is now in force through to 2024.