U.S. Markets closed

A Big Deal Reignites Cannabis Stocks

David Borun
A Big Deal Reignites Cannabis Stocks

Late last Thursday, during the final trading session of a holiday-shortened week, Canadian Cannabis company Canopy Growth Corp (CGC) announced that it had reached an agreement to purchase 100% of US cannabis investment company Acreage Holdings in a uniquely structured deal.

It’s a sign that the industry has come a long way in a very short time since the phrase “big marijuana deal” meant something else entirely…

Though the industry seems ripe for consolidation - with huge, established players with cash to spend hungrily eyeing smaller upstarts who have interesting intellectual property or market position – the patchwork of cannabis laws in North America has made traditional deal making a challenge.

Specifically, Canadian cannabis producers can list their shares on major US exchanges NYSE and NASDAQ, provided only that they don’t do business in the US, as can US-based companies like Tilray (TLRY) who operate exclusively North of the border. Companies who sell cannabis in the US – even if only in the states where it is legal – are relegated to the OTC markets (or Canadian exchanges.)

Canopy is a big player in the Canadian market and would love to increase it’s reach into the much larger US market, but it prohibited from doing so because of its status as a US-listed company.

Acreage is a US company that owns 87 dispensaries and 22 cultivation facilities in the US in jurisdictions where those activities are legal, as well as valuable, limited-supply licenses and permits for that activity. They describe themselves as “vertically integrated,” participating in cultivating, processing and dispensing.

Acreage also boasts former US House Speaker John Boehner, former Massachusetts Governor William Weld and former Canadian Prime Minister Brian Mulroney as members of the board, as well as other heavy-hitters from the corporate world. It’s a heavily stacked team.

The Deal

In an innovative arrangement, Canopy will acquire all of Acreage by paying $300M in cash up front and acquire the right to complete the deal by exchanging the rest of the Acreage shares for .58 shares of Canopy each. Current share prices imply a total purchase price of $3.4B.

The kicker is that Canopy has the right to back out of the deal if Marijuana is not legal at the federal level in the US within 7 years.

Canopy gets a foothold in the coveted US market while remaining clearly inside US laws and exchange requirements and Acreage gets a big pile of cash to fuel its voracious acquisition habits.

So what do you call it, an acquisition? Merger? Call option? In a way it’s really all of these.

It could also be called a “win-win,” except that there’s an extra factor – 38% of Canopy is owned by US beverage giant Constellation Brands (STZ), which also holds warrants to take its ownership above 50%. Because the Canopy-Acreage deal would dilute that interest, Constellation has the right (per the terms of its original deal with Canopy) to extend the time period and increase the stake it can purchase.

So basically, Constellation owns options that just rose in value.

So it’s a win-win-win.

Confused yet?

Stay tuned, because this is likely to be just the tip of the iceberg for creative M&A activity in the cannabis industry.

The Takeaway

The markets appear to love the deal, with Canopy shares up more than 10% since last Wednesday before the deal was announced, and Constellation up more than 6%. For a big-cap Constellation, that amounts to more than $2.5 billion in added value in just two trading days.

This arrangement also highlights that although there remains an inconsistent set of laws and regulations that would appear to stifle the growth of the cannabis industry in North America, creative minds tend to find their way around senseless roadblocks.

It might also be a wake up call to US legislators who are on the fence about two current bills in Congress to make federal laws about marijuana more consistent.

Is Your Investment Advisor Fumbling Your Financial Future? See how you can more effectively safeguard your retirement with a new Special Report, “4 Warning Signs Your Investment Advisor Might Be Sabotaging Your Financial Future.” Click to get it free >>


Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
Constellation Brands Inc (STZ) : Free Stock Analysis Report
 
Canopy Growth Corporation (CGC) : Free Stock Analysis Report
 
To read this article on Zacks.com click here.
 
Zacks Investment Research