'Scale Is Really the Thing' in Canopy Deal to Acquire U.S. Cannabis Company Acreage

April 18, 2019

By Chloe Aiello

Canadian cannabis giant Canopy Growth announced on Thursday a major deal to acquire Acreage Holdings, a U.S. medical cannabis company whose board includes former U.S. House Speaker John Boehner. The blockbuster deal will effectively cement Canopy's presence in the burgeoning U.S. marijuana industry ー but only after marijuana is legalized on the federal level.

"The deal isn't done, done until cannabis is fully legal in the U.S., and of course we don't know when that's going to happen. But it's all signed, and that's just the trigger event," said Debra Borchardt, co-founder, CEO and editor in chief of Green Market Report. "So it really is a done deal and we expect these stocks to really start to trade in lock with each other."

Canopy Growth ($CGC), is the world's largest legal cannabis producer. It currently trades on both the New York Stock Exchange and the Toronto Stock Exchange, and both exchanges ban listed companies from being involved in illegal industries. Because marijuana still illegal on a federal level in the U.S., Canopy is prohibited now from doing business in the U.S.

But that doesn't mean Canopy and its other "big pot" contemporaries including Tilray ($TLRY), Cronos Group ($CRON), and Aurora Cannabis ($ACB) aren't itching to get their claws into the U.S. cannabis industry, which is already projected to outshine Canada's.

The Wall Street financial firm Cowen has estimated that the total adult use market in Canada generates about $4.5 billion to $5.3 billion in revenue, whereas the U.S. generates an estimated $50 billion, when including black market revenues.

"If Canopy Growth would have just taken [Acreage] on today, then that would have affected their listing here. But by doing it this way they've locked them in, but then they haven't gotten in trouble with the New York Stock Exchange," Borchardt said.

And Acreage represents a major strategic play. Following its announcement on Thursday ー which was overshadowed by the Canopy announcement ー that it would acquire Deep Roots Medical in Nevada, the company has a presence in 20 U.S. states, giving it the largest footprint in the U.S.

"Scale is really the thing. Now you are basically taking the biggest company in Canada, the biggest company in the U.S. and putting them together ー that's just crazy. Then you throw in the Constellation Brands piece of it with the beverages. So you've really got a monster company here," Borchardt said, referencing Constellation Brands' $4 billion investment in Canopy last August.

Plus Acreage boasts a roster of high profile backers, like former House Speaker John Boehner and Bill Weld, the former Governor of Massachusetts and a Republican Presidential challenger to Trump, who Borchardt said have "got people there in D.C." who see where the industry is heading.

"If you talk to anyone out of D.C., they are expecting we are going to see some sort of rescheduling, maybe this year, possibly this year, but maybe even early next year," she added.

Cowen's cannabis analyst Vivien Azer said Canopy likely viewed Acreage's political ties as "offering outsized value," and said the re-introduction of the bipartisan STATES Act probably triggered the deal ー whether or not it actually passes through Congress. Sen. Elizabeth Warren (D-Mass.), a current democratic presidential candidate, Sen. Cory Gardner (R-Colo.), and Rep. Earl Blumenauer (D-Ore.) were among the bipartisan sponsors that reintroduced It seeks to shield from federal interference individuals and businesses within the cannabis industry that are operating in accordance with local law.

"Conversations around the potential for M&A between the U.S. and Canadian operators has unsurprisingly increased meaningfully," Azer said, adding that "while Cowen's view is skeptical of the ultimate passage of the STATES Act in the 116th Congress, we are unsurprised by the increased focus on the very attractive U.S. market."