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Leading Canadian and US cannabis companies Canopy Growth (NYSE:CGC,TSX:WEED) and Acreage Holdings (CSE:ACGR.U,OTCQX:ACRGF) have stunned the markets with a new acquisition plan.
On Thursday (April 18), the two cannabis firms confirmed an agreement to grant Canopy an acquisition option for Acreage when cannabis becomes federally legal in the US.
If approved by shareholders and the option is exercised, Canopy will make a payment to Acreage holders of US$300 million or around US$2.55 per ACGR share.
If the deal goes through, Acreage holders will get 0.5818 of a Canopy common share per share. The two firms are valuing the transaction at approximately US$3.4 billion, indicating a premium of 41.7 percent over a 30 day average price as of Tuesday’s (April 16) close.
According to the agreement, a termination fee of US$150 million has been included, payable by Acreage Holdings.
It is no secret that Canadian firms have been vying for an entry point into the coveted US market. This represents one of the first clear steps a Canadian leading cannabis producer has taken to enter the US.
By way of this peculiar arrangement, Canopy is side-stepping a potential delisting in New York and Toronto. The standards of the exchanges Canopy lists in demand no company directly operate in the still federally illegal US cannabis market.
Bruce Linton, co-CEO of the Canadian firm, told BNN Bloomberg that this deal was vetted by exchange regulators and will not provoke any challenges from the New York Stock Exchange or the Toronto Stock Exchange.
Marijuana remains a scheduled substance at a federal level in the US. However, the introduction of legalization programs in several states has opened the doors to the rise of these multi-state operators (MSOs).
These firms operate in the US with assets across the country in legal cannabis jurisdictions. Linton added that agreements have been discussed with six other undisclosed US companies.
The executive guessed that fellow Canadian firms would follow the same structure put forward by this agreement.
Kevin Murphy, CEO and chairman of Acreage Holdings, hinted that the deal represents a way to support his company at a time when ramp up for MSOs is proving to be more challenging than expected.
“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,” Murphy said in a press release.
Acreage holds a market value of US$963.14 million as of Thursday.
Shares of Canopy and Acreage rose as the deal was first rumored on Wednesday (April 17) and finally confirmed on Thursday.
Canopy’s stock in New York closed at a price of US$44.85, representing a 3.99 percent increase for the day. During after hours trading the company saw a marginal increase of 0.65 percent.
Shares of the Canadian firm in Toronto also surged 4.43 percent to finish the day with a price of C$59.64.
Acreage shares ended Thursday’s trading session with a marginal drop of 0.62 percent for a price of US$22.35.
This agreement also highlights the differences in working capital available to Canadian companies compared to MSOs.
American companies don’t have access to the same financing options available to Canadian players. While MSOs have gained ground in the public markets thanks to a flood of listings in Canada, the difference in operating capital remains substantial between US and Canadian operations.
Murphy said if the option to acquire is exercised, his company will get access to Canopy’s “deep resources,” including its financial injection from alcohol producer Constellation Brands (NYSE:STZ).
In a previous interview with the Investing News Network (INN), Greg Taylor, chief investment officer of Purpose Investments, speculated that the pressure to enter the US market for Canadian players could even lead to a listing change.
As the US market grows and the appetite for investors migrates south of the border, Taylor said he could see a debate as to why a leading Canadian firm wouldn’t want to de-list from a TMX Group Limited (TSX:X) exchange in favor for one that allows US operations.
“A lot of people going back a year really thought that the Canadian companies would have two or three years to get up and running in the Canadian market.
Taylor added that the market has been caught off guard with how quickly these MSOs have gone from “afterthoughts” to established competing firms.
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Securities Disclosure: I, Bryan Mc Govern, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: Acreage Holdings is a client of the Investing News Network. This article is not paid-for content.
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