Only a few days after Canopy Growth (CGC) acquired a Spanish licensed cannabis producer, the company has announced a proposed deal to enter the U.S. market via the right to purchase Acreage Holdings (ACRGF) in the future. The move has high hopes for the U.S. government to approve cannabis at the federal level and makes the multi-state operators (MSOs) in the U.S. as the most attractive stocks going forward.
A Right That Might Not Happen
Due to listing requirements by the Toronto Stock Exchange and the NYSE, listed companies can’t own illegal operations. Since cannabis is illegal at the federal level, Canopy Growth is prevented from owning a U.S. cannabis company. The recent Farm Bill allows the company to enter the hemp market and CBD, but not pot.
For this reason, Canopy Growth has to make a deal that involves the right to purchase Acreage once federally approved. The company is paying $3.4 billion to buy Acreage with an upfront cost of $300 million for this future right.
The deal involves a $2.55 per share upfront payment to investors for waiting plus an agreement to receive 0.5818 shares of Canopy Growth once the deal closes. At the current stock price of $46, Acreage shareholders have a right to a Canopy Growth stock worth $26.76 plus the $2.55 payment. The stock only trades right above $23 on the deal.
The problem for shareholders is that the outcome is unknown. The U.S. is likely to approve cannabis in the future, but no guarantee exists. Not to mention, where Canopy Growth trades at that point is another high risk as the company has aggressive global expansion plans such as the recent deal in Spain.
Other U.S. MSOs.
While Acreage is listed as a leading MSO in the U.S., the company trails other companies like Harvest Health & Recreation (HRVSF). Acreage is listed as having agreements for cannabis-related licenses in 20 states with rights to 87 dispensaries and 22 cultivation and processing sites.
Harvest Health has a deal pending with Verano that gives the combined company the right operate up to 200 facilities in 16 states with 123 dispensaries. Harvest Health expects to have 70 dispensaries and 26 cultivation and manufacturing facilities open by the end of 2019.
The backing of Constellation Brands (STZ) provides Canopy Growth with the cash and shares to promote Acreage to offer up to $1.4 billion worth of shares for future acquisitions. The proposal suggests that the company will look to rollup smaller companies during the waiting period likely placing a premium value on sub $1 billion cannabis companies in the U.S.
The key investor takeaway is that Canopy Growth is making the anticipated splash to enter the U.S. cannabis market, though via a highly delayed right to buy Acreage in the future. Investors shouldn’t expect other U.S. MSOs to accept similar deals in the future with such deals locking in values based on current prices.
Canopy stock went up on the news and could breakout to new all-time highs above $60.
Regardless, the better stocks remain the pure plays on the U.S. cannabis market. Acreage is now on the acquisition trail and the inevitable U.S. entry by the other large Canadian LPs either via similar rights to purchase deals or once the cannabis if federally legal will make the U.S. companies more valuable.
To read more on the nitty gritty of what’s going on in the rising cannabis industry, click here.
Disclosure: The author has no position in Canopy Growth stock.
Read more on CGC:
- Canopy Growth (CGC): Piper Jaffray Wishes Upon a Marijuana Star (But Will Its Dreams Come True?)
- Canopy Growth (CGC): Is This Spanish Acquisition Too Good to Be True?
- Canopy (CGC): Seaport Cuts Estimates, Reiterates Neutral on the Cannabis Stock