American multi-state cannabis operator Acreage Holdings Inc. says it is “very confident” its proposed acquisition by Canopy Growth Corp. will get shareholder approval next month despite activist investor Marcato Capital Management LP calling it a “value-destroying” transaction and urging Acreage shareholders to vote against the deal.
“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.
Canopy’s proposed acquisition of Acreage received major pushback Monday from Marcato’s Mick McGuire, an activist investor who is characterizing the transaction as a “bad deal” for Acreage shareholders, and “unbelievably lopsided in favour of Canopy.”
San Francisco-based Marcato Capital owns 2.7 per cent of Acreage, or 575,000 shares, through a number of funds, and plans to vote against the transaction next month mainly due to the firm’s belief that the deal value of US$3.4 billion is “substantially lower” that Acreage’s fair value.
Acreage’s stock fell almost five per cent as news of Marcato’s position on the deal broke Monday morning. In a letter to Acreage board of directors, McGuire took specific aim at Canopy’s high enterprise-value to EBIDTA multiple, a measure of the fair market value of a company, versus that of Acreage, which was in a range that investors would typically consider healthy.
“Acreage’s shareholders are being asked to exchange an attractively valued security for a highly speculative one,” McGuire wrote. Canopy has a market value that is almost 10 times that of Acreage’s. “Acreage’s shareholders have no ability to predict when, or if, the actual share exchange will occur and must finance an incredibly high borrowing cost to hedge their Canopy exposure if they want to maintain their stake through any potential closing period,” the letter read.
In mid-April, Canopy announced it had reached an agreement with Acreage that would give it the right to acquire all of the New York-based company’s shares, if and when cannabis is legalized on a federal level in the United States. The deal is also subject to the approval of shareholders from both companies and the Supreme Court of British Columbia — once that happens, Acreage will receive a payment of US$300 million from Canopy. But since the announcement of the deal, Acreage’s share price has fallen by as much as six per cent, while Canopy’s stock has surged more than 15 per cent, an indication, according to McGuire, that even shareholders share Marcato’s view that the deal is lopsided in favour of Canopy.
“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,” said McGuire in the letter. Acreage is in the retail distribution and cultivation business and owns licences to grow or sell cannabis in 20 states with a total addressable market of 180 million Americans.
It is among the five largest American cannabis companies by market value, and its board features a number of prominent former politicians, including former U.S. House of Representatives Speaker John Boehner, and former Canadian prime minister Brian Mulroney.
If Acreage is intent on selling the company prior to any kind of federal legalization in the U.S., McGuire proposes that it run a “formal and competitive sale process” that would involve Canopy, along with any major company in the alcohol, tobacco, cannabis or consumer-packaged goods industries to bid for Acreage in an auction-like process that would see the winner acquire Acreage for “cash and/or valuable risk-adjusted currency.”
The deal has been viewed as almost unanimously favourable in the cannabis industry because it represents a loophole of sorts, in which Canopy is able to have future access to U.S. assets while being listed on the Toronto Stock Exchange and the New York Stock Exchange.
As long as they are listed, both exchanges bar cannabis companies from investing in or owning U.S. assets due to the federally illegal status of the drug.
“We believe the transaction moves Canopy closer to realizing the upside of U.S. cannabis. The addition of a U.S. operator with political prowess on the board, likely de-risks American commercialization,” wrote Royal Bank of Canada cannabis analyst Douglas Miehm in a note just days after the transaction.
GMP Securities analyst Martin Landry upgraded his position on Canopy to “buy” following the announcement of the deal, citing the price of the acquisition and the access Canopy will gain to an estimated $50 billion market.
Canopy was not available for comment.