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Mergers and Acquisitions

Canopy Growth Is Likely Just the First Big Player to Bet on US Ending Prohibition

Canopy's acquisition of Acreage contingent on US legalization is probably just the first such deal as the industry grows increasingly confident prohibition will soon end.
Canopy Growth Is Likely Just the First Big Player to Bet on US Ending Prohibition
Image credit: Bloomberg | Getty Images
5 min read
Brought to you by Daily Marijuana Observer

Canadian giant Canopy Growth Corp. (NYSE:CGC) (TSX:WEED) is poised to take another leap forward in its ongoing expansion into global cannabis markets. As of Thursday, April 18, 2019, the mega company secured the right to acquire Acreage Holdings, Inc. (CSE:ACRG.U) (OTC:ACRGF) for $3.4 billion – contingent upon cannabis legalization in the United States. Acreage is a multi-state operator that includes a diverse portfolio of cannabis cultivation, processing, and dispensing operations across the U.S. Its contribution to Canopy’s already extensive production facilities, well-known brands, and strategic assets will provide significant opportunity for new value creation. Naturally, this was not lost on the markets as both companies saw shares jump at news of the transaction.

In the meantime, Canopy can also continue to list its shares on both the Toronto Stock Exchange (TSX) and more importantly, the New York Stock Exchange (NYSE). (Neither exchange allows companies that own shares in businesses that run illegal operations, currently including marijuana in the U.S.) Listing requirements can be demanding, but come with significant perks for growing players like Canopy. Trading on major indices alongside established blue chips adds legitimacy to the once infamous cannabis business, and also enhances analyst coverage, investor interest, and trading liquidity.

Canopy’s move is considered a good one. The deal locks up a solid investment by allowing the company instant access to established cannabis brands and distribution across the U.S. (The transaction also takes Acreage out of play for Canopy’s competitors, a tactical win for Canopy in itself.) As strides in American legislation and cultural acceptance of cannabis use grow, the opportunity in cannabis is widely viewed to be in the U.S. space.

As such, other Canadian LPs may follow suit. Big players like Aurora Cannabis Inc. (NYSE:ACB) (TSX:ACB), Cronos Group Inc. (NASDAQ:CRON) (TSX:CRON) -- flush with a $2 billion cash injection from Altria Group Inc. (NYSE:MO) --  Hexo Corp (NYSE:HEXO), and Tilray Inc. (NASDAQ:TLRY), are likely making similar bets on the U.S. market, and want to be ready to launch stateside when the time comes. Smart multi-state licensed operators with deep vertical integration, like iAnthus Capital Holdings, Inc. (CSE:IAN) (OTC:ITHUF) and Green Thumb Industries (CSE:GTII) (OTC:GTBIF), are considered attractive targets, especially at potentially undervalued price levels.

Related: Canopy Growth Agrees to Buy Acreage When the US Ends Prohibition

Big and Bigger

At a $15 billion or so market cap, Canopy is currently the largest legal cannabis company in the world. It grows, processes, and sells medical and recreational cannabis in Canada, with extensive medical marijuana operations in other countries, including in Europe, South America, and Australia. Canopy’s brands include Tweed (a widely recognized brand of marijuana) and Spectrum Cannabis (its international medical brand), among others.

Since debuting on the NYSE last year, Canopy has seen big gains and significant investor interest. The company turned in a 13.6% return for 2018, despite negative returns for major U.S. indices over the same period.

The Acreage deal is not the first time Canopy has purchased warrants in companies with U.S. operations. In November, Canopy (through its investment subsidiary, Canopy Rivers Inc., RIV), obtained warrants worth 20% of Slang Worldwide (CSE:SLNG) (OTC:SLGWF), a Toronto-based cannabis CPG company with several U.S.-based assets, including Denver-based Organa Brands, owner of several popular vaporizer, edible, and concentrate brands.

Constellation Gets In

Canopy’s outsized growth has come thanks in large part to massive capital infusions from Constellation Brands, Inc. (NYSE:STZ), the Fortune 500 beverage giant that owns Corona and Modelo beers, among others. Constellation closed out 2018 with a $4 billion investment in Canopy to access the burgeoning cannabis market via funding strategic acquisition and building synergies with its existing beverage operations.

With the Acreage deal, Constellation is doubling down on the sector and eventual U.S. acceptance. By allowing Canopy to move forward on Acreage (Constellation gave up its veto power on the acquisition in exchange for a longer exercise period on additional Canopy warrants), Constellation is signaling that it’s committed to pot and that the U.S. market, in particular, will be key to building long-term enterprise value.

A Foothold in the U.S.

Acreage is one of the largest cannabis operators in the U.S. with a broad footprint across 20 states. In addition to its many licenses, strong management team and other assets, Acreage has strong U.S. political connections, including to John Boehner, the former Speaker of the U.S. House of Representatives who sits on the Acreage Board. These connections will no doubt better direct cross-border efforts to enact cannabis-friendly U.S. legislation, such as the STATES Act, allowing cannabis businesses to access banking services and U.S exchange listings, as well as to push for federal legalization more generally.

It’s Only the Beginning

The Canopy deal signals the beginning of what is sure to be a tsunami of mergers and acquisition activity involving Canadian licensed producers and U.S. based operators, as U.S. regulation loosens and markets open. To be sure, this will not be lost on the U.S. capital markets, including banks, tax specialists and other ancillary industries, and in an effort to participate, they may step up pressure on lawmakers to legalize. In short, no one will want to be left out, and more deals are sure to come.

This article was first published in Daily Marijuana Observer, a content partner of Green Entrepreneur.

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