Steve Misener Examines Canopy Growth Corp’s (TSE:WEED) Deal to Acquire Acreage (CNSX:ACRG.U)
Midas Letter Capital Markets Advisor Steve Misener, CFA, breaks down Canopy Growth Corp’s (TSE:WEED) (NYSE:CGC) (FRA:11L1) planned acquisition of Acreage Holdings Inc (CNSX:ACRG.U) (OTCMKTS:ACRGF). Misener believes the deal represents a win for both companies and suggests that Acreage had to act as liquidity issues and the fact that its stock was trading below its IPO price meant it would be less than favourable for the company to raise more equity. Acreage is now in 20 states and Misener suggests the buildout of that footprint may have seriously depleted the company’s IPO funds. Misener indicates that the market is not currently pricing in the company’s eventual share price when the sale is finalized because of the unknown timeline of US federal decriminalization. Misener believes this unknown is what is creating the discount between the potential for the Acreage shares when the deal is finalized and current prices. Misener suggests Acreage, which has not released a financial statement since its IPO, now has access to needed capital through Canopy Growth and Constellation Brands. The deal has provided necessary liquidity and access to essential capital. According to Misener, the deal makes Canopy even more attractive to fund managers, as it gives the company a much-needed US footprint.
James West: I’m joined now by Steve Misener, CFA, one of Canada’s most recognized figures in the institutional investment space. Steve, welcome back to the show.
Steve Misener: Thanks, James, my pleasure.
James West: Steve, we had some interesting comments in a conversation about the transaction whereby Canopy Growth is planning to acquire Acreage Holdings, and we more or less arrived at a similar conclusion, which is that at the end of the day, this is a win-win for both sides. My preference was to point out that this is why, that I don’t like to be involved with companies that have supervoting structures, because I can guarantee that Kevin Murphy, who exercised 83 percent of the votes, did not buy his shares at $25 a share like the IPO round holders. So how do you portray that as a win for shareholders of Acreage?
Steve Misener: Well, Acreage needed to do something, because the stock was down from the IPO price – I believe it was $25 last November, and given the liquidity issues, weaker liquidity in the stock, and the fact that it was trading below its IPO price, it was going to be a less than favourable opportunity for them to raise more equity money at a down round, so to speak.
So they needed to do something; they’re building this massive footprint in the US, I believe at the time of their IPO in November they were, I think, in 12 to 14 states; now they’re suggesting 20 where they have either operations or pending operations. They’ve always wanted to be a one-stop shopping, massive footprint in the US. That costs cash, lots of cash. I think they raised somewhere in the $300 million, $320 million USD at the time of the IPO, but when you have 20 little mouths in 20 states requiring capital, that’s a fairly heavy burn.
James West: Yeah. Acreage hasn’t filed a financial statement since going public, and so we really don’t know what their burn rate is at this point, do we?
Steve Misener: We don’t know. I’m not sure when it’s due, but it’s got to be imminent; perhaps at the end of April, it’s due. Because of the IPO in November, I think they altered their year-end, perhaps, to December, so that’s pending, for certain. But we know in these businesses on a generic basis, and from observing the businesses, that the buildout costs money, and when you’re going in a multi-state basis and you’re making acquisitions and you’re funding buildout of cultivation and extraction facilities, we know that costs money.
James West: Sure. The shares of Acreage have sold off somewhat dramatically; stock’s down 5 percent since they announced the deal, which suggests that shareholders are not uniformly pleased with the outcome of this point. Now, I’m trying to juxtapose that, and this is where I agree with you in that it is a win for the shareholders, is that the total dollar per share premium of the transaction when it’s executed, meaning when cannabis goes federally legal in the United States, the full dollar amount is $36 a share, which represents a pretty serious premium to the VWAP closing price of, I think, what was it – $22.50 or something?
So then, if the US were to legalize cannabis federally today, that would imply that Acreage shares are worth $36 to $38 a share. Clearly, the existing market is not pricing that premium in. Why is that?
Steve Misener: Well, a number of factors. I mean, the issue of legalization in the US is still a wild card for sure, because it has to go through Congress and Senate and other votes like that.
James West: Couldn’t Donald Trump just do it by executive decision?
Steve Misener: I don’t know. Perhaps, but I’m sure it would get some blowback in Congress. But that said, when typically any kind of arrangement is made between public companies, it’s usually a much shorter timeline. This is an unknown timeline. Regardless of prognostications in certain politicians saying that they want to go ahead with it, there’s nothing concrete in terms of a timeline or legislatively on the table, and it’s a very, very complicated issue as the states have more rights individually than they do in Canada as provinces. So it’ll be a complex issue, and I think that unknown is what’s offering in part the discount between what the potential is for Acreage shares when the deal gets consummated.
In the meantime, arbitragers are trying to figure out what the appropriate discount should be between that future unknown down the road, and today’s price. And given that this is kind of a spike in the shares even from the time of the announcement and liquidity was difficult previously on Acreage shares for Acreage shareholders, there’s obviously been some sellers taking an opportunity to sell into this arbitrage strength.
James West: Sure. What kind of premium do you think should be priced into the shares of Acreage, considering that Acreage now has, essentially, Canopy as a banker. And Canopy, by extension, has Constellation as a banker, who, you know – so we’ve got Canopy, probably still with $4 billion on the balance sheet. You’ve got Constellation Brands, who’s got arguably an unlimited access to capital. Shouldn’t that count for something in the valuation of Acreage shares, even in the current unknown consummation of this transaction?
Steve Misener: Well, it certainly assists, and I wouldn’t use the term premium; what I would use is, the discount from the maybe ultimate resolution, or ultimate takeover. It’s a discount, rather than a premium. So yes, the fact that Acreage clearly, I think, needed money – they haven’t issued a financial statement since the IPO, but they’re obviously building a huge footprint, so they need money. The fact that the banking pass-through, as you said, from Constellation to Canopy right through to Acreage is huge for Acreage, and they needed to get access to capital, and we know that getting banking and bank loans is still difficult in the US in this particular space. so that’s the real plus for Acreage, and for Acreage shareholders, is this unknown discount to the deal price; but the arbitrage between the shares, as people try to figure out what the deal risk is, and how long this might take.
So it’s provided liquidity that the shareholders needed and the company needed in trading the stock, and it’s provided critical capital to Acreage. And it looks like a big plus for Canopy, as well.
James West: Yeah. So combined entity, basically, is by far the largest footprint in the cannabis industry in North America.
Steve Misener: Yeah, and perhaps – well, globally, really. I mean, if you’re a international fund manager and you want to own one cannabis stock, and you’re a really big fund manager, Canopy already was the go-to stock on the New York Stock Exchange. But as they have stated in many reviews of this deal, they didn’t have the footprint in the US, and this is kind of on an as if and when come down the road basis that they will have this footprint, so people can say that there’s yet another reason to buy Canopy today as a kind of one-stop, or the biggest player in this space, because they’ll have front row seats when it does go legal in the States, which inevitably it probably will, as many commentators feel. And they’ll have locked up this deal.
Meanwhile, Acreage has the capital that’s required pass through with this, you know, banking opportunity, because that’s really what it is; but Canopy doesn’t own any equity in Acreage, which is critical to their current status.
James West: Wow, Steve, great contribution as usual. We’ll leave it there and come back to you soon. Thanks for joining me.
Steve Misener: My pleasure, James.
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