Here, we break down this international M&A deal and explain what it means for the industry.
Canopy Growth announced April 18 that it had bought the rights to acquire Acreage Holdings, a U.S. cannabis company with a 20-state footprint. The $3.4-billion purchase price begins with a $300-million cash payment to secure that acquisition—contingent upon the potential U.S. federal legalization of cannabis.
If—or when—it gets to that point, the resulting combined business would create a “global cannabis powerhouse,” as the Canopy press release notes, and it’s hard to dispute that.
“Today we announce a complex transaction with a simple objective. Our right to acquire Acreage secures our entrance strategy into the United States as soon as a federally-permissible pathway exists,” said Canopy Chairman and Co-CEO Bruce Linton.
The deal will require shareholder approval from both companies, and votes are expected in June 2019. There is also, of course, the matter of regulatory approval from the Supreme Court of British Columbia. Furthermore, Canopy Growth is a publicly listed company on both the Toronto Stock Exchange and the New York Stock Exchange and, as such, is subject to securities regulations; the company may not take an ownership stake in another company whose plant-touching business is considered federally illegal.
Hence the contingency in this mammoth deal.
Canopy Growth has become the largest cannabis company in the world (based on market capitalization) through steady growth and strategic acquisitions within the global cannabis space. Recent acquisitions include: ebbu, AgriNextUSA and, most recently, Spanish cannabis producer Cafina.
In January, the company released its Q3 earnings report for its 2019 fiscal year: Canopy Growth boasted a 283-percent revenue increase. “Spend it and dominate,” Linton told CNBC earlier this year, describing his company’s approach to expansion, acquisition of global assets and analysis of regulatory trends—especially in the U.S.
The target of its latest acquisition, Acreage Holdings, has similarly been making moves in the fragmented North American cannabis industry. The company has established itself in 20 U.S. states through strategic transactions. Just this week, Acreage closed its acquisition of Form Factory and announced its purchase of Deep Roots Medical in Nevada.
CNBC reported that Canopy and Acreage management teams had been “in talks” over this deal for at least the past two weeks. The news broke late on April 17; by mid-morning on April 18, the $3.4-billion deal was formally announced, and cannabis stocks surged.
To secure the rights to this potential transaction, a $300-million upfront cash payment will be made to Acreage’s shareholders (those holding subordinate, proportionate and multiple voting shares), as well as unit holders and USCo2 holders. This payment equals $2.55 per subordinate voting share.
Upon the exercise of the deal (and U.S. federal legalization of cannabis), holders of subordinate voting shares of Acreage will receive 0.5818 of a common share of Canopy for every Acreage share held. Acreage Holdings trades publicly on the Canadian Securities Exchange.
The deal will also set up a licensing agreement between the two companies. Acreage will have access to Canopy’s Tweed and Tokyo Smoke brands (as well as others), once the deal is confirmed.
But for now, the two companies “will continue to operate independently,” according to the press release.