Canopy's Acreage structure clears path for future cross-border deals
Companies looking to create a foothold in the US cannabis market ahead of potential federal legalization will likely emulate Canadian cannabis giant Canopy Growth’s [TSX:WEED] proposed structure to acquire Acreage Holdings [CSE:ACGR.U].
The USD 3.4bn cash-and-stock deal announced last week gives Canopy the right to acquire New York-based Acreage, one of the US’ largest cultivators and retailers of medicinal and recreational marijuana, as soon as US federal law allows for the production and sale of cannabis.
The transaction came after several months of one-on-one talks between the two companies, said Jonathan Sherman, a partner at Cassels Brock & Blackwell who worked on the deal for Canopy. A separate source familiar with the deal said that while talks began in earnest in 2019, the companies have known each other for some time. Canopy, the source said, regularly meets informally with US businesses that are interested in working together.
Sherman said the caveat that delays the acquisition allows Canopy to keep its listing on the New York and Toronto exchanges, which forbid cannabis companies that touch the plant and have US operations due to the federal prohibition.
Once it was clear Canopy wanted to pursue Acreage, Sherman said, Canopy’s legal team began looking at different transaction structures and models, including a joint venture. He said he expects more deals like the one Canopy struck, whether it is Canadian companies looking at the US market or alcohol, tobacco or pharmaceutical companies seeking to acquire American cannabis operators.
Per the terms of the deal, Acreage shareholders will receive an immediate payment USD 300m, about USD 2.55 per voting share, and the companies will operate separately until it closes. Upon closing, Acreage investors will receive 0.5818 Canopy shares for every Acreage share.
Canopy’s market cap is about CAD 22.16bn; Acreage’s is about USD 917m. Acreage, in certain circumstances, will have to pay a termination fee of USD 150m if the deal falls through. According to the press release announcing the deal, if federal prohibition is not removed within 90 months of an upfront premium being paid to Acreage, the deal will terminate.
The acquisition will happen automatically when cannabis is legalized in the US, Canopy co-CEO Bruce Linton said. Acreage CEO Kevin Murphy said he expects the Strengthening the Tenth Amendment Through Entrusting States Act, which would exempt individuals and companies in the cannabis business, where it is legal, from federal law, to pass, easing prohibition and allowing the deal to close.
Kris Krane, president of 4Front Ventures, a US cannabis retailer and cultivator, also said he expects more similar deals in the future. At the same time, he said the transaction carries risks for both companies as Acreage could increase or decrease in value.
“Getting a deal like this done now where you’ve got that locked in when the law changes, it makes a lot of sense for a company like Canopy,” Krane said.
Other major cannabis players could begin looking at similar deals, Krane said, adding that the transaction adds more legitimacy to the nascent legal marijuana industry.
Linton said both companies are expected to increase in value and that the deal has benefits for both of them. Acreage will have access to cheaper capital, access to Canopy’s brands, and both will be part of a large and growing international operation.
“I think the risk is standing still and doing nothing,” Linton said.
One Canopy investor said there are risks for both companies but said he expects the deal to be successful. The investor added that it is worth it for Canopy to pay USD 300m upfront for the option to buy Acreage in the future because the combined company would be one of the largest marijuana companies in the world.
A similar framework will be used for more deals in the industry, agreed Nic Easley, CEO of cannabis investment company Multiverse Capital. But Easley said deals will likely not be made public when an agreement is reached. Easley estimated that in the next 12 to 18 months, strategics and sponsors will be making transactions in the cannabis space with a similar structure.
Greenhill & Co. Canada served as Canopy’s financial advisor. In addition to Cassels Brock, Paul Hastings LLP also provided legal advice to Canopy. PricewaterhouseCoopers acted as finance advisor to Canopy and Ernst & Young was its tax advisor. DLA Piper and Cozen O’Connor were Acreage’s legal counsel. Canaccord Genuity was Acreage’s financial advisor and INFOR Financial was the financial advisor for the special committee of Acreage.