The stock of American cannabis seller Acreage Holdings (ticker: ACRGF.OTC) jumped to $30 in April, when it agreed to a buyout by the Canadian marijuana producer Canopy Growth (CGC). Since then, however, Acreage stock has sunk below $19 per share, as many investors grumble that Acreage could have gotten a better deal.
Acreage and Canopy officially launched their charm offensive on the deal’s behalf on Thursday by publishing information circulars and voting materials for the June 19 shareholder vote. The companies say that Canopy’s offer represents a 40% premium for Acreage shareholders, and will create the world’s preeminent cannabis business. Canopy and Acreage have websites promoting their merger.
The deal struck April 18 was valued at $3.4 billion. It has some unusual conditions. That’s because Canopy only sells cannabis in countries like Canada, where it’s completely legal. Acreage and its U.S. rivals operate where cannabis is legal under state law, but marijuana remains illegal under federal law.
So Canopy would make a $300 million cash payment to Acreage stockholders—worth about $2.55 per Acreage share—if shareholders approve the deal. Canopy would then wait for pot to become federally legal in the U.S. before taking control of Acreage with an exchange of 0.5818 Canopy shares for each share of Acreage stock. The total value, the companies say, is worth 40% more than the Acreage share price before the deal was announced.
Read more in our feature: You’d Have to Be High to Buy American Marijuana Stocks
The acquisition would be triggered by federal legalization of marijuana, or a law like the proposed STATES Act, which would remove federal regulation of marijuana anywhere it’s legal under state law. But Canopy says it would waive those conditions, if permitted by the Toronto and NYSE exchanges where Canopy stock is listed.
Unhappy Acreage shareholders have said that’s not enough. In early May, the activist hedge fund Marcato Capital Management complained that the transaction would be “value destructive” to the 2.7% worth of Acreage it owned. While waiting indefinitely for federal legalization, Acreage investors would be losing out on the upside available to other U.S. pot companies, Marcato said.
So Marcato boss Mick McGuire said his firm would vote against the deal in June, when it must be approved by a majority of shares not controlled by Acreage chief executive Kevin Murphy.
Other Acreage stockholders are speaking in support of the deal. The private-equity firm Cresco Capital Partners was an early investor in Acreage and a bunch of other cannabis businesses, including Green Thumb Industries (GTBIF.OTC). Cresco managing partner Matt Hawkins published a letter Thursday that he’d sent his investors. The cannabis business is rapidly consolidating, Hawkins said, and success will be directly correlated with speed and market share.
Read our recent feature: CBD Is the New Marijuana. But Don’t Buy Into the Craze for Hemp Stocks.
With the $4 billion it got from its 38%-owner Constellation Brands (STZ), Canopy is one of the best-capitalized companies in cannabis, Hawkins said. Its takeover deal with Acreage would allow the U.S. company to fund expansion by issuing up to 58 million shares that could become future Canopy shares. That’s inexpensive capital for Acreage in the cash-starved American cannabis industry, Hawkins argued.
Canopy’s deal is structured to appeal to longtime shareholders in Acreage, like chief executive Murphy and early investors like Hawkins. The immediate $300 million cash payment would go into the pockets of Acreage shareholders, instead of the coffers of Acreage, where the company could use the cash for its business.
Hawkins acknowledged in an interview that venture investors like Cresco Capital stood to benefit more from the deal than those who got into Acreage’s stock after it went public. After all, Cresco bet early on the company when it was worth far less than it is today.
“We have a much different look at this than the folks that have come in later,” Hawkins told Barron’s. “We have already gotten our return built in. So we would much rather monetize our investments sooner rather than later.”
The Canopy bid has done little to keep Acreage from being one of the worst-performing stocks among U.S. cannabis operators. At its current depressed level—the New York-based Acreage has a market value of a bit more than $2 billion—Hawkins said there is even more reason for stockholders to vote for Canopy’s $3.4 billion deal.
Write to Bill Alpert at william.alpert@barrons.com
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