Shares of Canopy Growth (CGC) are on the rise after the company confirmed a deal, not to outright acquire Acreage Holdings (ACRGF), but to buy the rights to purchase the company when and if marijuana becomes federally legal in the U.S. at an agreed-upon price. Commenting on the deal, Jefferies analyst Owen Bennett said he views the move as a "big positive," as he believes the price would be "way ahead of whatever has been agreed right now" if Canopy were to wait to acquire a U.S. operator.
CANOPY TO BUY ACREAGE IF POT MADE LEGAL IN U.S.: Canopy Growth announced on Thursday an agreement that grants the company the right to acquire 100% of the shares of Acreage Holdings, with a requirement to do so at such time as cannabis production and sale becomes federally legal in the U.S., subject to obtaining the requisite prior approval of the shareholders of each of Acreage and Canopy Growth, respectively, as well as the approval of the Supreme Court of British Columbia. Following the approval of Canopy Growth and Acreage shareholders as well as the Supreme Court of British Columbia, under the terms of the arrangement agreement, Acreage Holders will receive an aggregate total payment of $300M or approximately $2.55 per Acreage Subordinate Voting Share based on the currently outstanding Subordinate Voting Shares of Acreage and conversion of certain convertible securities. In addition, upon the exercise of the Right, holders of subordinate voting shares of Acreage will receive 0.5818 of a common share of Canopy Growth for each Acreage Subordinate Voting Share held at the time of closing of the transaction. Upon exercise of the right, the total consideration payable pursuant to the transaction is valued at approximately $3.4B on a fully-diluted basis, represents a premium of 41.7% over the 30-day volume weighted average price of the Acreage Subordinate Voting Shares on the Canadian Securities Exchange ending April 16. The agreement contains representations, warranties and covenants, including a termination fee in the amount of $150M payable by Acreage in the event that the transaction is terminated in certain circumstances.
CONSTELLATION AGREES TO MODIFY WARRANTS: Constellation Brands (STZ) also announced that it plans to enter into an agreement with Canopy Growth to modify certain warrants and other rights as the result of Canopy's intentions to acquire Acreage Holdings upon U.S. Federal cannabis legalization. Constellation has agreed to waive its veto rights to this transaction subject to certain proposed modifications to the warrants and other conditions, the company said.
DEAL A 'BIG POSITIVE': With Canopy Growth sitting on C$4B of cash it got due to previous deal with Constellation Brands and the U.S. being the world's biggest market, Jefferies' Bennett views this move as a "big positive." If Canopy were to wait to acquire a U.S operator post its listing requirements permitting, the price paid would be "way ahead of whatever has been agreed right now," he argued. The analyst pointed out that the U.S. is the world's biggest market by far, with his current estimates on a 10-year DCF giving the U.S. an EV of $60B versus the international opportunity of $30B. Bennett has a Hold rating and a C$64 price target on Canopy Growth's shares.
PRICE ACTION: In morning trading, shares of Canopy Growth have gained over 8% to $46.30.