(Shareholders on Wednesday approved the merger of Canopy Growth and Acreage Holdings. For the latest, click here.)
All eyes are on two of the largest cannabis companies in North America this week as shareholders at Canopy Growth and Acreage Holdings prepare to vote Wednesday on their planned megamerger.
Shareholders of both New York-based Acreage (CSE: ACRG.U) and Smiths Falls, Ontario-based Canopy Growth (NYSE: CGC; TSX: WEED) are scheduled to attend special meetings as the companies seek approval for a plan that would pave the way for the first major Canadian/U.S. cannabis deal.
Ahead of the big decision – which includes camps of vocal supporters and opponents – here is what investors and observers need to know:
If approved by shareholders, the deal will give Canopy the right to acquire all of Acreage’s shares if and when the United States legalizes cannabis production and sales at a national level.
The agreement, announced in April, gives Acreage an immediate payment of $300 million, or $2.55 per Acreage subordinate voting share based on outstanding shares.
In addition, if exercised, holders of Acreage’s subordinate voting shares will receive 0.5818 Canopy common share per share held – which priced the deal at roughly $3.4 billion when it was announced.
That would make it the richest M&A transaction in the cannabis industry to date.
Shareholder sentiment, analyst insight
At the time of the deal’s announcement, many industry insiders and analysts touted it as a possible template and catalyst that could spark similar tie-ups.
“People consider the U.S. to be the crown jewel of the cannabis market, and now there is a blueprint available for everyone that wants to get in,” Jesse Pytlak, an analyst with Toronto-based Cormark Securities, told Marijuana Business Daily at the time.
The list of potential acquirers of cannabis companies, he noted, extends beyond Canadian licensees and includes big beverage companies and Big Tobacco.
Heading into today’s vote, Acreage has said at least 91% of its shareholders eligible to participate have indicated they will support the agreement.
However, Acreage shareholder Marcato Capital Management – which holds a less than 3% stake in the firm – said it plans to vote against the deal, saying the offer by Canopy undervalues the company.
Andrew Kessner, an analyst with New York-based William O’Neil, agreed.
“You probably don’t want to put a cap on your valuation today if you think your share price is going to appreciate more than 30% over the next few years,” Kessner said at the time of the deal.
“The proposed deal is open-ended in too many ways,” he wrote in a note to clients.
“When the deal will close, if it will close at all,” are among the biggest uncertainties.
The view from the top
As for Acreage and Canopy, both companies have been on a media roadshow breaking down the near- and long-term perks of the deal.
The most immediate upside for Canopy: the potential to tap into the rapidly expanding U.S. cannabis market with a company that currently boasts the largest national footprint, with licenses or operations in nearly 20 states.
For Acreage, the firm gains access to Canopy brands such as Tweed and Tokyo Smoke, plus other intellectual property.
“Canopy has spent hundreds of millions of dollars on IP, technology, know-how and research – that’s money I don’t have to spend at Acreage for our shareholders to get access to that,” Acreage Holdings CEO Kevin Murphy said.
As for whether the deal undervalues Acreage or that the timing was too soon, Murphy offered:
“If someone can predict the market and believes that there was something left on the table because of some future, higher valuation, I would love to meet them, and I would give them all my money.
“People think this business is easy – it’s the green rush. It’s the hardest business I’ve ever been in. It’s a very challenging, competitive marketplace.
“From my vantage point, this is probably the sagest, most thoughtful endeavor in the cannabis space.”
Lisa Bernard-Kuhn can be reached at [email protected]
Get more in-depth analysis of this deal – and others in the cannabis industry – with an Investor Intelligence subscription.