Canopy Growth and Acreage Holdings Rework Purchase Agreement

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Canada’s Canopy Growth Corporation has modified the terms of an agreement to purchase New York-based cannabis firm Acreage Holdings that was inked last year.

On Thursday, the two companies jointly announced several revisions to a landmark deal that was struck in April 2019 and was previously valued at $3.4 billion

As part of their original arrangement, Canopy provided $300 million in cash upfront to Acreage shareholders (about $2.55 per share) and secured the right to acquire 100% of the company when U.S. lawmakers ease laws around the federal prohibition of cannabis. 

Under the terms of the new agreement, which is pending shareholder approval, Canopy will provide another $37.5 million (30 cents per share) advanced cash payment to Acreage shareholders but rework other components of the transaction that will reduce the overall value of the deal to about $900 million, according to Cowen analyst Vivien Azer.

The newly structured agreement calls for the creation of two classes of Acreage shares, whereby 70% of the existing shares will be converted into “fixed” shares that can be swapped for 0.3048 of a Canopy share once cannabis laws in the U.S. change.

Under the previous arrangement, Acreage shareholders would have received 0.5818 of a common share of Canopy Growth.

In an email to THCnet, Acreage vice president of communications Howard Schacter noted that on a split adjusted basis, the exchange ratio of fixed shares actually decreased from 0.41 (0.5818 x 0.7) to 0.30.

Meanwhile, the remaining 30% of Acreage shares will be reclassified as “floating” shares and listed separately on the Canadian Securities Exchange under a new ticker symbol.

Canopy will have the option to acquire the floating shares at a minimum of $6.41 per share or a price equal to the 30-day volume weighted average price (whichever is higher).

In a news release, Canopy CEO David Klein called the U.S. a “core market” for the Canadian firm and said the new agreement “solidifies” its “path forward with Acreage.”

"I am excited to bring our relationship with Acreage back to centre stage in our U.S. strategy and look forward to a time when the laws in the United States permit us to finalize this transaction as we march toward bringing our exciting beverage products to the US,” he said.

In conjunction with the new arrangement, Acreage founder and CEO Kevin Murphy will step aside but continue to serve as the chair of the firm’s board. Current board director Bill Van Faasen -- the former chairman and CEO of Blue Cross Blue Shield of Massachusetts -- will take over as interim CEO while Acreage searches for a permanent replacement.

Additionally, Canopy has agreed to provide an Acreage subsidiary up to $100 million in debt financing to launch a new hemp division focused on the U.S. CBD market. Canopy will initially loan Acreage $50 million at an annual interest rate of 6.1%. 

According to Schacter, the new U.S. hemp division will look to capitalize on a “$10 billion market opportunity.” 

The new debt funding, which is not guaranteed and not convertible, will mature in 10 years, according to the release. It also comes with far more favorable terms than what Acreage was recently able to negotiate from an unnamed institutional investor, who loaned the company $15 million at a jaw-dropping 60% interest rate.

In his email, Schacter described the previous $15 million raise as a “strategic bridge loan that provided Acreage with funds to help with impending transactions that were nearing deadlines.”

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Beyond the alterations to the acquisition agreement and the new debt financing, it’s worth noting that both Acreage and Canopy executives appear to have adopted a somewhat broader definition of what would qualify as a “triggering event.”

When the deal was first announced, Canopy said the deal was tied to the federal legalization of marijuana in the U.S.

More recent comments from both companies indicate that a simple loosening of federal laws -- via measures such as the STATES Act or perhaps even the SAFE Banking Act -- could enable the deal to move forward.

“The deal actually hinges on federal permissibility, not necessarily legalization,” Schacter wrote to THCnet, noting that an international player such as Canopy, which trades on the Toronto Stock Exchange and New York Stock Exchange (NYSE), is currently restricted from participating directly in a U.S. cannabis business until laws change.

Nevertheless, both Murphy and Klein believe that federal legalization is on the horizon.

In an interview last week with CNBC’s Jim Cramer, the host of Mad Money, Klein said 2020 was the “magic number.”

“I think, as you watch more and more states move to legalization for medical or rec, you really bring in almost two more senators each time who are really going to feel compelled to not make criminals out of the people in their state who are doing what’s legal in their particular state,” he said.

For his part, Murphy believes the “eventual federal permissibility of cannabis in the United States is inevitable.” 

According to Schacter, Canopy is required to acquire 70% of Acreage shares “when reform happens that meets the criteria of federal permissibility.”

“However, Canopy has stated that it would do so in advance if they had confidence that it would not result in being delisted by U.S. exchanges,” he added.

The deadline for the deal was extended from 2027 to 2030, but signs are pointing to the merger being consummated before then.

For her part, Azer views the amended deal as a “positive for both organizations.

In a note to investors on Thursday, Azer wrote that Acreage gets much-needed capital while shareholders get more upside. For Canopy, the revised structure provides less dilution and give it more options. 

Acreage will report its first quarter financial results after the market closes on Thursday. A call with investors and analysts is scheduled for Friday morning, and management is expected to provide commentary on the new deal as well as the company’s ongoing efforts to cut costs and become cash flow positive.  

On top of the $15 million in debt-financing Acreage announced last week, the company also negotiated a pair of agreements that will bring in a combined $60 million earlier this month.

In addition to raising new working capital, Acreage has taken several steps to preserve cash and improve profitability, including canceling planned acquisitions, selling certain assets and scaling back its workforce.

Acreage — which counts former House Speaker John Boehner and former Canadian Prime Minister Brian Mulroney as board members — lost $150 million in 2019, according to filings.

Additional information about the revised agreement with Canopy can be found in the official press release.


Tags: M&A

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