Canopy signs US$3.4B deal to buy N.Y.-based Acreage Holdings if pot legal in U.S.

Canopy Growth Corp. has struck a deal to pay US$300-million for the right to buy U.S. cannabis company Acreage Holdings Inc. if cannabis production and sale becomes federally legal in the United States — which they anticipate could happen within the next year.

The deal, which if consummated would be valued at US$3.4 billion, is aimed at creating a “global cannabis powerhouse,” the companies said Thursday, and would give Canopy a strong foothold in the massive, lucrative U.S. market.

The Smiths Falls, Ont.-based cannabis company had been in discussions with a handful of U.S. multi-state operators but Acreage — which has a presence in 20 states and a board packed with political heavyweights — was the best choice, said Canopy’s chairman and co-chief executive Bruce Linton.

“Acreage obviously came up to the top of the stack,” he said in an interview.

Under the cash-and-stock deal, Canopy will initially pay US$300 million to Acreage shareholders. Upon federal legalization of cannabis production and sale south of the border, Canopy will then acquire 100 per cent of the shares of the New York-based cannabis company.

While cannabis is legal for medical and recreational purposes in several U.S. states, it remains illegal under federal law and is considered a Schedule 1 drug. Canadian cannabis companies with U.S. dealings cannot list on the Toronto Stock Exchange and U.S. pot stocks cannot list on U.S. exchanges.

However, the political climate south of the border is becoming more receptive to cannabis. Earlier this month, a U.S. bill that would allow banks to serve cannabis companies in states where legal, known as the SAFE act, was introduced in the House. Also this month, the bipartisan STATES Act — which would amend the Controlled Substances Act and could effectively make cannabis federally legal in states where recreational consumption is legal — was reintroduced in Congress.

Acreage’s chief executive Kevin Murphy said he believes the STATES act will pass within the next 12 months, citing strong support from both Democrats and Republicans and the popularity of cannabis reform in the U.S.

Having access to Canopy Growth’s resources will enable Acreage to innovate, develop and distribute cannabis brands across the country and continue to expand its U.S. footprint, he said.

“If we want to be assured to be ahead of the pack, we need to think globally… They have done a lot of things right,” Murphy said in an interview. “We think we can learn from a lot of those lessons, and that’s where we believe the accretion happens for both parties.”

The complex transaction announced Thursday was “comprehensively reviewed and considered,” by exchange operators and other stakeholders, said Linton.

“We, of course, needed to make sure that exchanges were comfortable with it, banks were comfortable with it, folks that put really big bucks into us were comfortable with it,” he said.

The deal marks an “important first step for Canopy to become a leader” in the legal U.S. cannabis market, said Piper Jaffray & Co. analyst Michael Lavery.

The U.S. cannabis market including illicit sales is estimated to be worth US$35 billion to US$50 billion, roughly 10 times the size of Canada’s market, he added.

“By acquiring Acreage, Canopy would obtain U.S. licences, a key barrier to entry… We believe Canopy’s global footprint and Acreage’s footprint in the U.S. should position the company for sustainable growth momentum,” Lavery said in a note to clients.

It is unknown when the U.S. may potentially legalize cannabis, but it is estimated to occur within the next two to five years, or possibly sooner, he added.

The companies said Thursday the agreement is terminated if U.S. federal legalization of cannabis sales and production does not occur within 90 months, or 7.5 years.

Shares of Canopy rose as much as 11.8 per cent on the Toronto Stock Exchange to $63.85, but closed at $59.64, up 4.43 per cent. Acreage’s stock on the Canadian Securities Exchange closed relatively flat.

Acreage — whose board of directors includes former Canadian prime minister Brian Mulroney and former speaker of the U.S. House of Representatives John Boehner — owns licences to operate or has management services agreements in place with licence holders in 20 states, including pending acquisitions.

The companies said Thursday they will also execute a licensing agreement granting Acreage access to Canopy Growth’s brands including Tweed and Tokyo Smoke, along with other intellectual property.

As part of the deal, which is subject to regulatory and shareholder approvals, Acreage shareholders will receive an immediate payment of approximately US$2.55 per subordinate voting share or US$300 million.

Once cannabis becomes federally legal in the U.S. and Canopy exercises its right, it will pay an additional 0.5818 of a Canopy share for each Acreage subordinate voting share. This represents a premium of 41.7 per cent over the 30-day volume weighted average price of Acreage ending on April 16.

The strategic deal comes after Canopy got a infusion of capital from global alcohol giant Constellation Brands.

In October 2017, Constellation signed a deal to acquire a nearly 10 per cent stake in Canopy for $245 million. In November, the U.S.-based maker of Corona beer invested an additional $5 billion in Canopy, upping its stake to 37 per cent and acquiring warrants that would, if exercised, increase its ownership to more than 50 per cent.

At the time, Linton called it “rocket fuel” for Canopy’s global ambitions as more markets legalize cannabis around the world.

On Thursday, Canopy said as part of the announced transaction, it has extended the expiry date of certain warrants held by Constellation Brands. However, if the Acreage deal is completed and Constellation exercised all of its outstanding warrants in Canopy, the alcohol company’s stake in the company is not expected to exceed 50 per cent. Constellation would also be permitted to purchase up to 20 million shares in the open market prior to the warrants being exercised or terminated, however.

Acreage is an attractive target for Canopy as it has the broadest geographic footprint among the U.S. multi-state operators and is among the most politically connected, said Cowen analyst Vivien Azer.

“These relationships will likely prove helpful in pushing for a change in U.S. laws surrounding cannabis,” she said in a note.

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