Canopy Growth signs $3.4 billion deal to buy U.S. pot company Acreage

Leading Canadian pot producer Canopy Growth Corp. says it has struck a deal that could turn it into the “undisputed leader” in the United States’ cannabis market — but only if the U.S. federal government ever makes growing and selling the drug legal.

Smiths Falls, Ont.-headquartered Canopy announced Thursday it had reached an agreement that gives it the right to buy New York-based cannabis cultivator, processor and retailer Acreage Holdings Inc.

The approximately US$3.4-billion acquisition hinges on the requirement, a press release stated, that “cannabis production and sale becomes federally legal in the United States.”

In a release, Canopy chairman and co-CEO Bruce Linton called it a “complex transaction with a simple objective,” namely gaining access to the much-larger market of marijuana consumers south of the Canadian border.

“Our right to acquire Acreage secures our entrance strategy into the United States as soon as a federally-permissible pathway exists,” Linton said.

According to the release, the combination of the two companies would “immediately create the undisputed leader in U.S. cannabis, the only relevant market where Canopy Growth does not yet have a major presence.”

Acreage has licences to operate or agreements in place with other licence holders in 20 states.

The company, which is also known for having former Canadian Prime Minister Brian Mulroney and former Speaker of the U.S. House of Representatives John Boehner on its board of directors, says Canopy’s deep pockets would allow it to keep on growing in the United States.

“At the same time, a confluence of factors are making it much more difficult for a multi-state operator to achieve its full potential, including the enormous amount of cash required to scale,” said Acreage chairman, CEO and President Kevin Murphy in a release. “Our board of directors, management team and I are pleased to deliver significantly increased liquidity to our shareholders and put ourselves in an even stronger position to deliver continued and significant upside.”

The deal requires approvals from shareholders, the Supreme Court of British Columbia, three stock exchanges and other regulatory sign-offs and closing conditions. There is also a break-fee of US$150 million that Acreage would have to pay if the transaction is terminated for certain reasons.

Once approvals are received from shareholders and the court, Canopy would pay US$300 million in cash. Once the right to Acreage is triggered, the company’s shareholders (which encompasses a few different types of stock) would get 0.5818 of a Canopy share for each of their Acreage subordinate voting shares owned when the deal closes.

Ultimately, assuming the conversion of all the Acreage securities following federal legalization, Acreage shareholders would own approximately 12.1 per cent of Canopy, and up to 16.6 per cent if certain allowable acquisitions go through before legalization.

Under the terms of the deal, Acreage is allowed to issue more than 63 million more subordinate voting shares or convertible securities “in respect of certain potential acquisitions by Acreage‎,” the release said.

Acreage announced Thursday that its subsidiary had reached an agreement to buy a cannabis company in Nevada for US$120 million, to be paid in units of the subsidiary and $20 million cash. In March, Acreage said it had an all-stock, US$11.5-million deal to buy a California-based dispensary operator.

The Canopy-Acreage deal would also prompt some changes between Canopy and U.S.-based alcohol giant Constellation Brands Inc., which made an approximately $5-billion investment in the pot company last year.

Constellation said it had agreed to waive its veto rights on the transaction subject to certain changes, such as extending the expiry date on warrants it has for Canopy shares.

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