Acquisition of Acreage speaks to breakout of U.S. cannabis stocks
The biggest event of the week was Canopy Growth’s (TSX: WEED) (NYSE: CGC) announcement that it was acquiring the right to acquire Acreage Holdings (CSE: ACGR.U) that is a U.S. multi-state cannabis operator. WEED will pay US $300 million or approximately $2.55 per Subordinate Voting Share (SVS) plus .5818 of a common share of WEED for every SVS at the time of closing. By agreement, the closing must take place at such time as cannabis production and sale become federally legal in the U.S. Ultimately, this will be a $3.4 billion transaction or a premium of 41.7% over the legally defined value of each SVS share. Before closing, a number of legal, regulatory and shareholder approvals must be received as well.
A couple of thoughts. First, it is not lost on me that Acreage is a leading U.S. multi-state operator (MSO). Clearly this transaction means we are on the same page strategically as WEED. Second, I think it also speaks to the timing of a breakout in the U.S. cannabis stocks. The two previous major transactions with Constellation Brands (NYSE: STZ) were cross-border, cross-industry investments from the U.S. into Canada. As a result, it was the Canadian cannabis stocks that benefitted most.
This is a cross-border, same industry transaction from Canada into the U.S. I am sure there will be some excitement created in the Canadian market but the main beneficiaries of this transaction will be the U.S.-based cannabis stocks, especially the MSOs. Finally, the Canadian cannabis market response to Constellation/Canopy was spectacular. Constellation/Canopy II stimulated a strong but not spectacular reaction. In this case, I think the reaction in Canada will be limited. It is the American MSOs and other cannabis operators that stand to benefit.