By MARK RENDELL
Thursday, June 20, 2019
The cannabis industry's first major cross-border deal received approval on Wednesday, with shareholders of both Canopy Growth Corp. and U.S. marijuana firm Acreage Holdings Inc. voting overwhelmingly in favour of a partnership between the two companies.
The unusual deal will see Canopy pay US$300-million for the rights to acquire Acreage in the future at a predetermined share-exchange ratio. An actual acquisition - which was valued at around US$3.4-billion, based on both companies' share price when the deal was announced in April - will be triggered if U.S. federal cannabis laws change.
Canopy's agreement to acquire all of Acreage's outstanding shares does not expire for 71/2 years. The deal is being watched closely by other Canadian cannabis firms, as well as alcohol, tobacco and consumer goods companies, all eager to enter the U.S.
marijuana market without running afoul of federal law. Ninetynine per cent of Canopy shareholders, and 99.7 per cent of Acreage shareholders voted in favour of the plan on Wednesday.
The deal faced some public opposition last month, notably from San Francisco-based Marcato Capital Management LP, which owns around 2.7 per cent of Acreage. In a public letter to Acreage, the hedge fund's manager, Mick McGuire, called the deal "unbelievably lopsided in Canopy's favour" and "highly imprudent," given an anticipated higher valuation for the company once U.S. federal restrictions loosen.
Any opposition, however, was bound to have little impact. Acreage's chief executive officer Kevin Murphy controls the majority of the company's voting power through multiple voting shares - each worth 3,000 votes a share - giving him complete control over shareholder decision-making.
The deal's complicated structure is mostly due to stock exchange listing rules. Because cannabis remains federally illegal in the U.S., major exchanges such as the Toronto Stock Exchange, New York Stock Exchange and Nasdaq Exchange won't let listed companies participate directly in U.S. cannabis business, even in states that have legalized the drug at a local level.
That's forced Canopy, and other large publicly traded Canadian licensed producers (LPs), to come up with creative ways to gain exposure to U.S. state-level markets, which are among the largest, most mature and most dynamic cannabis markets in the world.
"Completion of the transaction is intended to position us to efficiently and effectively enter the U.S. cannabis market once federally permissible," Canopy co-CEO Bruce Linton said in a news release.
Acreage is one of a handful of rapidly growing U.S. cannabis companies, known as multistate operators (MSOs), that have been locking up licences and brands in individual markets across the country. Acreage has licences to operate cultivation facilities and dispensaries in 20 states.
The company is still a startup, doing only US$12.9-million in revenue and posting a US$24-million net loss in its most recent quarter. However, it's managed to recruit prominent board members, including former prime minister Brian Mulroney and former speaker of the U.S. House of Representatives John Boehner.
Even before the Acreage announcement in April, Canopy had been building up hemp assets in the U.S. as well as making conditional investments in smaller operators such as TerrAscend Corp. and Slang Worldwide Inc. that are pushing into the U.S. The Acreage announcement, however, sets the stage for the first megamerger between a Canadian LP and an MSO.
The deal structure, put together by lawyers at Cassels Brock & Blackwell LLP, is being studied by other cannabis firms on both sides of the border.
"Since that time, people have had an opportunity to dissect that structure, find whatever holes they may find in it, and develop alternatives that are currently being vetted with [the] New York Stock Exchange and Nasdaq," Steve White, the CEO of MSO Harvest Health & Recreation Inc., said at an investor conference in Toronto earlier this month.
"There's more than one structure, but that's the first one somebody was able to throw out there. Frankly, I think it's amazing for Canopy, great for Acreage, and I think in the end, probably best for all of us [other MSOs] that that deal did occur and we saw that there's a pathway for that to happen," Mr. White said.
The deal still needs to be approved by the B.C. Supreme Court.
Canopy co-CEO Bruce Linton says completion of the Acreage transaction 'is intended to position [Canopy] to efficiently and effectively enter the U.S. cannabis market once federally permissible.'