Canopy Growth, the Canadian cannabis company backed by Corona owner Constellation Brands (STZ), announced plans Thursday to buy US cannabis firm Acreage Holdings.
But there’s a catch. Before the deal can go through, the U.S. government must legalize production and sale of cannabis products. That’s a big “if.”
Here’s the story: https://www.cnn.com/2019/04/18/investing/canopy-growth-acquisition-acreage-holdings/index.html.
What do you think of this deal and the odds for a successful outcome?
That seems like a very significant stipulation. Makes me wonder 1) why they announced so early in advance of the deal actually going through, or 2) they feel legalization at the federal level is closer than we think.
This deal is an innovative method of financial engineering that is real
Before I dive into analysis, it’s important first to understand the deal terms
Here is a high level summary of the terms
The “until Cannabis is legal in the US” verbiage basically gives Canopy the ability to take control and be in the US market without running afoul with their TSX or NYSE listing, which is a critical component of their financing strategy.
Here are a few reasons why I think this deal is brilliant
Access to Capital. Right now, Canadian LPs have much more access to capital due to their ability to list on “main-stream” listing. The top public Canadian LPs (Canopy, Cronos, Aphria, Aurora, Tilray etc) are trade at revenue premiums that are 3-5x what public US MSOs (Cresco, Trulieve, Harvest, MedMen, Green Thumb), which ultimately translates into easier access to cheap capital. To use an analogy, it’s like Canopy can get a loan for 3% and a US operator pays 15% for the same money. Assuming that both parties deploy capital at relative efficiencies, it’s easy to see how Canopy has an advantage
Success Possibility. While there are plenty (especially in this forum) that might have things to say about Canopy’s actual ability to execute as a Cannabis grower, it is generally indisputable that Bruce and his team are the best in the industry when it comes to financial, business & legal engineering (which is a big reason why Corona/Constellation brands sunk $$billions$$ into Canopy). Black Swan events aside, It’s not likely that they would risk $300 million if they had any serious doubt that the merger won’t go through
What does it mean for the industry? This deal has paved the way for a lot more capital (e.g., the institutional guys) to flow into the US because now, the big pension/hedge funds who were limited by the nebulous federal illegality of Cannabis can now enter the market through “legal” Canadian entities…I would expect that this will (1) make things harder for smaller start-up guys in the industry, (2) lead to a lot greater consolidation of US growers and (3) accelerate the move towards value add (e.g., brands / extracts as opposed to commodity dry flower) as more big guys come in with scale and capital and drive down production costs and market prices…
Hope this helps. Happy to discuss, dive into this on a deeper level too 
-Charles
Could be CGC put it out there to simply manipulate the stock price! 300M doesn’t take long to cover with the stock valuation jumping 5-10 points!! Color me a skeptic!!!
Here’s a more general story about the rise in cannabis investments: https://www.cnn.com/2019/04/19/investing/cannabis-stocks-420/index.html. In the story, Dan Ahrens, chief operating officer with investment firm AdvisorShares. “…there are going to be home runs and there will be lots of strikeouts.” Ahrens thinks that investors need to be patient and selective. But he believes they will be rewarded — that is, if they wind up picking the winners.
This administration and many members of the more libertarian type units within the parties are on board. The focus seems to be on removing from schedule so that medical rights are easily obtained and it would seem that the likelihood this will include a flat out descheduling to allow recreational on a national level without federal interference is likely [in the near future]. This is especially the opinion, of course, of representatives in states that already have medical programs and / or a good environment for heavy production. “The Farm Bill” wasn’t the main case in other words. Also, there seems to be a real push, in light of this administrations distaste for big pharma and respect for farmers, along with a likewise attitude taking over D.C. in a lot of ways, to not regulate in a fashion that would restrict the market to big pharma or over regulation [and I think that, really, is why they are suddenly discussing just allowing everything under the sun, because if you already have recreational, there isn’t really any limitation outside of maybe who can and who cannot make a specific medical claim for a product that would matter]. There also seems to be a healthy push to avoid giving the market, in any intentional way, to only the big players in the world. Even in other places. Thailand for example just rejected Phillip Morris outright and told them they could not have a license.
I can tell you that they likely care less about this deal or if or if not it happens and any sort of statement that comes over as a demand will have no impact on what happens next. As a matter of fact they [the officials] would be wise to not encourage selling the industry to outside investors from other nations let alone cite doing so as some sort of positive or pressing reason.
I see this as a clear indication that they predict the same and I predict a lot more types of these statements will start being made. My current prediction is that it will happen close to election time.
