After a particularly busy period last year, merger mania in the legal weed industry is still showing no signs of a cool-down. Reports have emerged that Canadian pot giant, Canopy Growth Corp. (TSX:WEED, NYSE:CGC), is planning a $3.4 billion takeover of New York-based weed operator, Acreage Holdings, Inc. (OTCQX:ACRGF), sending Acreage shares soaring 21 percent while shares of Canopy have climbed nearly 10 percent.
Acreage Holdings is one of U.S.’ largest vertically integrated weed operators.
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Source: CNN Money
The two companies have been in talks for weeks and have reached an agreement for Canopy Growth to acquire Acreage for $300M in cash plus CGC shares for a total transaction value of ~$3.4 billion.
If Acreage shareholders give the thumbs up, they will end up owning ~12.1 percent of Acreage after the deal is consummated on a pro forma basis. However, their stake could climb to 16.6 percent if Acreage is able to complete other acquisitions prior to the federal legalization of cannabis in the U.S. The merger will also need the blessing of a simple majority of Canopy Growth shareholders.
The Boehner connection
If successful, the acquisition will give Canopy a nice entry point into the giant U.S. pot market. Last year, Corona beer maker, Constellation Brands Inc. (NYSE:STZ) struck a $4 deal with Canopy that will facilitate the manufacture of marijuana-infused beverages.
Currently, Canopy’s listings on the New York Stock Exchange and the Toronto Stock Exchange prevent it from entering the U.S. pot market because both exchanges explicitly prohibit companies under their umbrellas from violating any U.S. federal laws.
Acreage will also benefit from the deal by gaining access to Canopy’s popular pot brands such as Tokyo Smoke, Tweed and other IP assets.
Acreage listed on the Canadian Securities Exchange last year, and has seen its market value soar to hit $2.6 billion, making it one of the largest U.S.-based pot companies on the exchange. Meanwhile, Canopy Growth is possibly one of the largest legal weed operators in the world, with its 4.3 million square feet of licensed capacity representing 35 percent of Canada’s entire weed industry.
This is not your typical M&A deal though, because it stands to be terminated if marijuana is not legalized federally in the U.S. in the next 90 months, or 7.5 years.
Maybe the fact that the company enjoys the patronage of powerful investors will help expedite the process. Acreage boasts former Canadian Prime Minister Brian Mulroney as well as former U.S. House Speaker John Boehner as directors.
Unlike its Northern neighbor, the U.S. federal government is yet to legalize marijuana though several states have already done so. Currently, only 10 states have legalized recreational marijuana while 33 have legalized medical marijuana.
The Canopy-Acreage takeover, however, might not have to run down its 90-month deadline for the deal to be consummated with the legalization drive now receiving ample support by Congress. About a week ago, a bipartisan group of lawmakers introduced a bill that will solve a big headache for the legal weed industry: lack of access to financial services.
The bill, dubbed the Secure And Fair Enforcement (SAFE) Banking Act, was filed by Senators Cory Gardner (R-CO) and Jeff Merkley (D-OR) along with 20 other co-sponsors and seeks to shield banks from being punished by federal regulators for doing business with cannabis establishments.
None other than Treasury secretary Steven Mnuchin himself has indicated his support for increasing banking access for marijuana businesses. Ongoing federal prohibitions makes many financial institutions wary of working with state-licensed operators, thus denying marijuana operators credit facilities and forcing them to operate on a cash-only basis.
The marijuana space clearly is geared for prime time, and it might only be a matter of time before it eclipses the $75-billion soda industry.
By Alex Kimani for conil.me