Marijuana industry leader Canopy Growth has struck a deal to buy New York-based Acreage Holdings in what would be the first major Canada-U.S. cannabis transaction – but the purchase won’t be executed until the U.S. government removes federal prohibition.
The combination of the two companies would create a North American cannabis juggernaut.
The move is sure to drive up valuations across the American marijuana sector, according to analysts.
To stay onside stock market rules that bar Canopy from investing in businesses that break federal law, Canopy would not immediately purchase Acreage outright.
The deal announced Thursday gives Canopy the right to acquire all of Acreage’s shares when cannabis production and sale becomes legal at a national level in the United States.
Under the terms of the agreement, Acreage will receive an immediate payment of $300 million.
In addition, if exercised, holders of Acreage’s subordinate voting shares will receive 0.5818 per Canopy common share – valuing the deal at $3.4 billion, which would make it the richest M&A transaction in the cannabis industry.
Acreage also gains access to Canopy brands such as Tweed and Tokyo Smoke, plus other intellectual property.
That blueprint is not without precedent.
Canopy has a similar deal with Slang Worldwide – a brand and distribution company with operations in the United States – to acquire a stake via 31.6 million warrants, exercisable if the U.S. legalizes cannabis federally.
The land grab for ownership of license assets in key American markets will accelerate, experts say, not just for Canadian cannabis companies looking to take advantage of their attractive cost of capital but for businesses across multiple sectors.
“This transaction will light a fire under executives in every market that is impacted by cannabis, including alcohol, tobacco and consumer products,” said Max Mausner, senior analyst at Vantage Asset Management in Toronto.
He said entering the U.S. market will only get more expensive.
“Limited license frameworks and tight state-level regulatory control of cannabis production and distribution means moats are being dug today by the early movers such as Acreage, Cresco or Curaleaf – moats that will only become more expensive to cross as the incumbents build brands and expand their national market share.”
Canopy has been on the hunt for international acquisitions for months.
The Ontario company is flush with cash after global liquor firm Constellation Brands injected an industry-record 5 billion Canadian dollars ($3.8 billion) in the Canadian company last summer.
At the time, Canopy CEO Bruce Linton said the deal would be “rocket fuel” for the firm’s international expansion.
The reported deal with Acreage comes in the wake of Canopy’s move to enter the U.S. hemp industry.
Canopy laid out plans in late 2018 to invest up to $150 million in New York state in hemp.
A month earlier, Canopy acquired Colorado-based hemp company Ebbu for CA$25 million in cash and another CA$100 million conditional on scientific-related milestones.
Canadian cannabis companies – including Canopy – are prepared to pour billions into international expansion strategies, branching away from what is a relatively small Canadian market.
Ontario-based cannabis firm CannTrust is also planning to enter the U.S. market.
“We are in active conversation on the hemp side in the U.S. trying to find trusted partners we can work with. Those discussions are in relatively early stages,” CEO Peter Aceto said during a recent conference call.
In 2018, 140 U.S. cannabis companies were targets of mergers and acquisitions, a substantial increase over the previous year’s 86.
Helping to fuel the acquisition binge, Canadian cannabis firms raised a record CA$11.96 billion in 2018.
Two of the largest cannabis M&As thus far include:
- Aurora Cannabis acquired rival cannabis producer MedReleaf one year ago for CA$3.2 billion.
- More recently, Arizona-based Harvest Health & Recreation reached an agreement to buy Chicago’s Verano Holdings for $850 million.