Last year, Canopy Growth (NYSE:CGC) announced a $3.4 billion conditional buyout of U.S. multi-state operator Acreage Holdings (OTCMKTS:ACRGF). Canopy recently amended the terms of that buyout deal, and it’s good news for CGC stock investors.
Canopy is taking advantage of the depressed valuations in the cannabis space to get a much better price for Acreage. At the same time, Acreage is getting a much-needed cash infusion.
The Amended Terms
First off, the original Acreage buyout deal and the amended deal are both conditional. Those deals become official only if the U.S. legalizes marijuana on a federal level.
The original deal was for Canopy to acquire 100% ownership of Acreage for $3.4 billion. The amended deal gives Canopy 70% ownership of Acreage at a price of 0.3048 CGC stock shares per Acreage share. Based on current market prices, that represents $843 million total.
Another way to look at it is the new deal values Acreage at about $1.2 billion, nearly a 65% discount to the valuation of the original deal. That’s good news for Canopy investors.
At the same time, Canopy retains the rights to opt to acquire the remaining 30% stake in Acreage as well. Canopy will pay at $6.41 per share or the 30-day volume-weighted average trading price of the stock, whichever one is higher.
It could be that Canopy will have to pay a much higher price for that final 30% ownership. But these days in the cannabis space, investors shouldn’t underappreciate the value of added financial flexibility.
Finally, Acreage CEO and founder Kevin Murphy stepped down as part of the amended deal. Ironically, Canopy is now doing to Acreage what Constellation Brands (NYSE:STZ) did to Canopy. Last year, Constellation gave Canopy founder and CEO Bruce Linton the boot and installed its own CFO in his place. I believe Canopy is now taking the same approach with Acreage and for the same reason. If and when a buyout happens, Canopy wants to make sure Acreage’s operations are running smoothly and fully positioned to make the transition as painless as possible.
What It Means For CGC Stock
In return for all the amended terms described above, Canopy is paying Acreage $37.5 million in up-front cash. It has also committed to lending Acreage up to $100 million. That cash infusion gives Acreage much-needed liquidity to continue to expand its business. It also represents just a fraction of Canopy’s potential savings from the amended buyout. Therefore, it looks like a win-win to me.
Bank of America analyst Bryan Spillane says CGC stock investors should be pleased with the new terms.
“Given Acreage’s lackluster performance, cannabis market conditions and unknown implications from COVID-19, we think that this arrangement is favorable to CGC shareholders while still
giving them a foothold in the US market when/if legalization is approved,” Spillane says.
“Acreage provides CGC with an advantage over its major peers as Acreage has licensed Canopy brands for sale in legal US states, giving name recognition in the US ahead of Federal legalization — yet keeping the deal in-line with applicable laws.”
Bank of America has a “buy” rating and $21.70 price target for CGC stock.
Cantor Fitzgerald analyst Pablo Zuanic says Canopy gained financial “protection” from the amendment.
“Yes, Canopy Growth may have to eventually disburse about $320M in cash (minimum price of $6.41 x ~50mn shares) to buy the floating shares (125mn x 0.30 + 12.4mn), but they may choose not to, also.” he says.
Cantor Fitzgerald has a “neutral” rating and $18.64 price target for CGC stock.
How To Play It
Considering all the unpredictability in the cannabis space, I have been recommending investors buy a basket of different cannabis stocks. Rather than attempting to guess the winner at this early stage, protect yourself via the power of diversification.
In addition to buying CGC stock, consider adding at least four or five other top cannabis stocks. I also like Canadian legal producers Aphria (NASDAQ:APHA) and Cronos (NASDAQ:CRON), as well as U.S. MSOs Cresco Labs (OTCMKTS:CRLBF) and Trulieve Cannabis (OTCMKTS:TCNNF).
Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. Mr. Duggan is the author of the book Beating Wall Street With Common Sense, which focuses on investing psychology and practical strategies to outperform the stock market. As of this writing, Wayne Duggan was long CGC.