Last week, news came out that Canopy Growth might be acquiring Acerage Holdings for $3.4B - a big number when you consider that the entire global industry is worth about $18B. But this landmark announcement has some caveats. Here’s our breakdown of the deal:
- The deal is contingent
The deal is less of a merger and more of a potential merger. Canopy Growth did not actually purchase Acerage Holdings, but instead purchased the right to a merger if/when US prohibition ends. This is a critical component which has some experts at odds. Because of US prohibition, no company holding US cannabis assets can trade on the NYSE or TSX
- $3.4B isn’t happening now
Canopy Growth only spent $300M on this deal and the termination fee is only $150M, which says a lot about perceived risk and puts a bit of a damper on the excitement being generated about the deal. Not to mention, Acerage Holdings' shareholders still have to vote on the deal - that will take place in June.
- The valuation is important
At a valuation of $3.4B, this sets a concerning standard in the space. We’ve longed argued that cannabis companies (especially in Canada) are over-valued, but a merger of this size has bigger implications as it raises the bar for licensed businesses. It also begs the question of how this will impact other M&A activity and if this high valuation potentially means a slow-down as other deals can’t compete with these high valuations.
- Its a big opportunity for shareholders
This deal means that Acerage Holdings shareholders could find themselves holding Canopy Growth stock - a company with tons of IP and that holds a piece of the global market through exportation to Europe.
- Share price jumps (& not jumps)
Canopy’s stock jumped by about 10%, settling back down at 8% - Acerage’s shares did not see such a jump. In fact, it was trading at a 30% discount to the price put forth in the transaction ($2.55 plus .5818 shares of Canopy per share of Acreage). The reason for this includes the fact that the details of the deal are a bit hazy and Acerage Holdings’ shareholders have yet to vote on the deal.