The Canopy Growth Corp deal will work out well for us, Acreage Holdings CEO says

It was a head-scratcher of a deal when it was first proposed but with shareholders for US multi-state operator Acreage Holdings (Acreage Holdings Stock Quote, Chart CSE:ACRG.U) set to vote later this month on a possible merger with Canadian cannabis giant Canopy Growth Corp (Canopy Growth Corp Stock Quote, Chart TSX:WEED), Acreage CEO Kevin Murphy says that by now investors should be feeling confident that through the deal, Acreage will have a much better shot at becoming a leader in the still-evolving US cannabis market.

“The next event for us will be the vote on June 19, for which we believe we have all the votes we need for the transaction to go forward,” said Murphy, in conversation with BNN Bloomberg Tuesday. “I think that the deal is becoming more understood every day, with the fact that it’s not a transaction to sell the business but a transaction for the future.”

Announced in April, Canopy’s $3.4 billion purchase of Acreage, which currently operates in 20 states across the US, would be contingent upon movement at the federal level in the United States to legalize cannabis — or, as per the precise wording, when cannabis becomes “federally permissible” in the US. The deal also includes a $300-million up-front payment to Acreage shareholders and would give Acreage the right to use Canopy’s intellectual property and business expertise during the ensuing time period before legalization occurs in the US.

Although the news gave an initial boost to Acreage’s share price, the stock has trailed off in the weeks since, in part due to a general selloff in the cannabis space. But there have been concerns raised about the deal, with some saying that it undercuts Acreage’s potential value. US hedge fund Marcato Capital Management, which owns about 2.7 per cent of Acreage’s outstanding shares, called the proposed deal “unbelievably lopsided” in Canopy’s favour and that Acreage deserves a higher premium due to its leading position among the crowd of US multi-state operators or MSOs.

For its part, Acreage management recently issued a press release stating that 91 per cent of eligible votes have already indicated their support for the merger. Murphy says that although the novelty of the deal was legitimate cause for hesitation, what Acreage will gain through partnering with Canopy will help it immeasurably in scaling up its US operations.

“This is the first deal of its kind. When you think about traditional M&A, you think about a start point and an endpoint. This is different —we’re now relying on federal permissibility to have this deal done, but from our vantage point, it’s a huge advantage at Acreage,” says Murphy.

“[Canopy] has spent hundreds of millions learnings lessons that we don’t have to spend on, and that’s a huge advantage over every other MSO in the United States today. We’re the largest player in the US with 20 states and we want to create more of a divide going forward,” he said.

In effect, Murphy claims that the $3.4-billion tag doesn’t cover what Acreage will ultimately be worth once Canopy decides to acquire it.

“The headline was ‘Acreage sells for $3.4 billion’ —not true,” he says. “That was the agreed-upon price when we did the deal, which was a 40-per-cent premium at the time. But we have the ability to create so much more value going forward to make this a much larger price in the future. So, it’s not about what you’re getting today, it’s what you’re going to own in the future which is the key to this transaction.”