Acreage Holdings (OTCMKTS:ACRGF), the New York City-based cannabis company recently accepted Canopy Growth’s (NYSE:CGC) $3.4 billion offer to merge once the U.S. government legalizes cannabis at the federal level. The tentative deal did wonders for both Acreage and CGC stock.
Marcato Capital Management owns 2.7% of Acreage. It opposes the transaction on the grounds the valuation isn’t nearly enough. The news has put a tiny dent in both company’s stock prices. Long term, I believe Marcato’s temper tantrum will do little to CGC stock, but hurt Acreage’s stock immensely. Here’s why.
Caving to Marcato Would Do Irreparable Harm to Acreage Stock
Is it just me or are activist investors getting way too much freedom these days to pound their drum when investments they’ve made aren’t going as planned?
Since when did a 2.7% ownership interest in any public company represent a quorum?
It’s not even close. It’s like a neighbor complaining about the sale of a property next door to a known developer. You can scream and shout and protest all you want but your ownership, or lack thereof, gives you very little say beyond the municipality planning rules, to stop whatever plans the developer has for the property.
Yet, the public markets are held ransom by investors like Marcato, who get on their soapbox to whine until they get their way.
“We believe Acreage’s strategic value, as one of the few multi-state operators of scale in the U.S., with leading positions in the most valuable markets merits a significant premium to any stand-alone cash-flow derived valuation,” Marcato stated in its letter to the investing public and Acreage’s board of directors. “Furthermore, we believe enterprise values of cannabis companies will skyrocket upon the relaxation of current Federal restrictions. Accordingly, Marcato believes it is highly imprudent for Acreage to sell itself today at the proposed valuation, with so much unlocked growth and value embedded in the Company.”
Would’ve, could’ve, should’ve.
Marcato can’t possibly know what the future holds. It’s putting the other 97.3% of Acreage shareholders at risk in a move that itself is “value destructive” and possibly irreparably harmful to the company’s share price.
A Smaller Piece of a Bigger Pie
The last time I checked, Acreage had $21.1 million in annual 2018 revenues and an adjusted EBITDA loss of $9.6 million. By comparison, Canopy had C$132.3 million in net revenue through the first nine months of fiscal 2019 and an adjusted EBITDA loss of C$69.0 million.
This deal will see Acreage shareholders join forces with one of the world’s largest cannabis companies; a company that’s got the full support of Constellation Brands (NYSE:STZ), itself operating one of the world’s largest alcoholic beverage businesses, and very skilled at global distribution.
So what happens if Marcato gets its way and the deal is scuttled?
I believe CGC stock will carry on, business as usual, while Acreage stock will struggle to find buyers should shareholders vote down the deal. Not to mention, Canopy Growth would likely make a vigorous fight to collect the $150 million break-up fee from Acreage.
More importantly, why haven’t we heard more opposition to the deal from Acreage shareholders?
“This really does appear to be a singular opinion, inconsistent with the positive feedback we have been getting from our shareholders since the deal was announced,” Howard Schacter, Acreage’s head of communications told the Financial Post.
They say the best deals are those where both sides win something from the transaction and also lose something.
In the case of Canopy Growth, the big positive is that it moves the company closer to U.S. cannabis. The downside is it puts Canopy Growth in wait mode while other competitors figure out how to gain legal entry to U.S. cannabis, potentially leapfrogging over it.
For Acreage, the positive is that it gains a guaranteed price for its business regardless of whatever its U.S. competitors do to grow their revenues. Sure, it’s possible that Acreage will become the leading producer of cannabis in the U.S. in five years. It’s also possible that it won’t, leaving the company on the outside looking in.
The downside for Acreage is that it will give up the chance to fetch a better price from another suitor — the argument Marcato’s making — depriving its shareholders of a better payday.
The Bottom Line on CGC Stock
I think Canopy Growth CEO Bruce Linton has pulled off an extraordinary move by aligning it with Acreage, one of the more politically savvy U.S. cannabis companies, without having to expend more than $300 million in near-term cash.
Acreage gets a substantial sum to continue building its business across 20 states while Canopy gets an ear to the U.S. market. In my opinion, it’s a win/win situation.
But make no mistake, if Marcato gets its way, CGC stock won’t be the loser in the deal.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.