Shareholders finally approved Canopy Growth ’s deal to buy the U.S. marijuana company Acreage Holdings. The acquisition won’t happen until Congress makes the growth, sale, and possession of pot federally legal, or at least permissible in states that allow the drug.
But when that time comes, Canopy will have a “significant competitive advantage” over its Canadian peers, according to an analyst at Stifel.
The back story. Canopy (ticker: CGC) was already one of Canada’s biggest cannabis growers. It has received significant investment from Constellation Brands (STZ), and has a market value is north of $14 billion. The stock has gained 60% in 2019.
The company said Wednesday that its deal to acquire the U.S.’s Acreage Holdings (ticker: ACRGF.OTC) was approved by shareholders. Acreage stockholders will get a $300 million cash payment as soon as this month. The rest of the deal is contingent upon U.S. legalization, when each Acreage share will be converted to 0.5818 of a Canopy share.
The deal was valued in mid-April at $3.4 billion, but that value could change based on either stock’s performance. In the meantime, Acreage can issue more than $1 billion worth of securities that could eventually convert into Canopy stock. The cash it could raise would help Acreage expand its operations in the U.S., where it has licenses to operate in 20 states.
What’s new. Stifel analyst Andrew Carter still thinks Canopy is the best investment in the global cannabis business.
He wrote in a note to clients Wednesday that the deal “supplements and amplifies Canopy’s ability to attack the largest global cannabis market.” He estimates there is a $100 billion opportunity in the U.S., and says the Acreage deal gives Canopy an edge over other Canadian growers like Aurora Cannabis (ACB) and Tilray (TLRY).
Carter called Acreage the U.S.’s largest multistate operator, or MSO, and noted he thinks the deal “is a true partnership to tackle the U.S. market.”
“We believe Canopy picked the best possible partner amongst the U.S. MSOs in terms of malleability, breadth, and trust in management,” he wrote.
Canopy stock was up 0.4% to $42.95 around noon on Thursday.
Looking ahead. Carter noted that federal legalization “is at best a 2021 possibility.” Until that happens, he says, Canadian companies that choose to operate only in markets where marijuana is federally legal will be at a disadvantage. American companies like Acreage and Curaleaf Holdings (CURLF) will have a chance to pull ahead in state markets that allow pot.
“Canopy’s agreement here amplifies Acreage’s capabilities as a U.S. MSO and de-risks Canopy from an extended period of U.S. prohibition given Acreage will be building Canopy’s position and key brands.”
Canopy is scheduled to announce its fourth-quarter 2019 earnings after the market closes on Thursday. Carter believes the report will “showcase the slower development of the Canadian market.” He estimates net sales will come in at 89 million Canadian dollars (US$67 million), below consensus expectations of C$91 million (US$68.9 million).
Write to Connor Smith at connor.smith@barrons.com
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