The US$3.4-billion deal struck by Canadian pot producer Canopy Growth Corp. for an American cannabis company could inspire some copycats, even if it first requires that the production and sale of cannabis becomes federally legal in the United States.
Smiths Falls, Ont.-based Canopy announced Thursday that it had reached an agreement granting it the right to acquire 100 per cent of the shares of New York-based Acreage Holdings Inc., a multi-state cannabis operator that has dispensaries, cultivation sites and processing facilities located across the U.S.
Canopy’s proposed acquisition of Acreage first requires, however, that there be federal legalization of cannabis in the United States, a press release said.
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The deal highlights the extent to which Canadian cannabis companies covet the much larger American market, and how imaginative they’ve become in positioning themselves for the eventual loosening of U.S. cannabis laws.
According to the press release, the combination of the two companies would “immediately create the undisputed leader in U.S. cannabis, the only relevant market where Canopy Growth does not yet have a major presence.”
A slew of legal and financial firms were involved in the proposed deal, which Canopy chairman and co-CEO Bruce Linton said in the release is a “complex transaction with a simple objective.”
“Our right to acquire Acreage secures our entrance strategy into the United States as soon as a federally-permissible pathway exists,” Linton said.
In a phone interview, Linton added that Canopy had been looking for such a deal for a few months.
Acreage, in addition to its presence in 20 states (including via some pending acquisitions), is also known for having former Canadian Prime Minister Brian Mulroney and former Speaker of the U.S. House of Representatives John Boehner on its board of directors.
“The combination of their footprint, their capabilities and their discipline made us really comfortable,” Linton said.
A number of states have legalized cannabis in some form, but Canadian cannabis companies that have pot businesses in the U.S. cannot list on the Toronto Stock Exchange, something that has complicated their U.S. ambitions.
Eric Foster, a partner at law firm Dentons, said the deal could be a “game-changer” for the industry, provided it gets the OK from regulators. There have been other transactions structured with a similar “triggering event,” but not on this size or scale, he said.
“I do think you’ll see more deals like this,” Foster said in a phone interview. “With maybe not identical, but certainly similar structures put in place, because it does allow the Canadian companies to get kind of a potential position in the U.S., even if it’s still somewhat optional.”
Acreage says Canopy’s deep pockets would allow it to continue with its U.S. expansion efforts.
“At the same time, a confluence of factors are making it much more difficult for a multi-state operator to achieve its full potential, including the enormous amount of cash required to scale,” said Acreage chairman, CEO and President Kevin Murphy in a release. “Our board of directors, management team and I are pleased to deliver significantly increased liquidity to our shareholders and put ourselves in an even stronger position to deliver continued and significant upside.”
Furthermore, legislation reintroduced earlier this month in Congress would amend the federal Controlled Substances Act, so that its provisions would not apply to anyone following state laws on marijuana.
Murphy said in a phone interview that passage of that legislation could even happen within the next 12 months.
“And if they’re the biggest in Canada, and we’re the biggest in the United States of America, well guess what? It’s pretty easy,” he said. “We’ve essentially secured our place on the podium.”
The Canopy-Acreage deal still requires shareholder, court, stock exchange and regulatory approvals. There is also a break-fee of US$150 million that Acreage would have to pay if the transaction is terminated for certain reasons.
Once approvals from the Supreme Court of British Columbia and shareholders are received, Canopy would pay Acreage shareholders US$300 million in cash. If (or when) the U.S. federal government legalizes cannabis, Acreage shares would be automatically exchanged for Canopy shares, at a ratio of one-to-0.5818.
Ultimately, assuming the conversion of all the Acreage securities following federal legalization, Acreage shareholders would own approximately 12.1 per cent of Canopy. That would rise to 16.6 per cent if certain acquisitions by Acreage go through before legalization.
Under the terms of the deal, Acreage is allowed to issue millions of additional shares “in respect of certain potential acquisitions by Acreage,” the release said.
Acreage announced Thursday that a subsidiary had reached an agreement to buy a cannabis company in Nevada for US$120 million, to be paid in units of the subsidiary and $20 million in cash.
U.S.-based alcohol giant Constellation Brands Inc. made an approximately $5-billion investment in Canopy last year, providing it with a war-chest for acquisitions. Constellation says it has agreed to waive its veto rights on the transaction subject to certain changes, such as extending the expiry date on warrants the company has for Canopy shares.