If you thought the original Canopy Growth (CGC) and Acreage Holdings (CSE:ACRG.U) deal was confusing, hold onto your hats because the amended deal is a doozy.
The two companies recently changed the terms of the original acquisition because valuations have changed dramatically and both of the original leaders are no longer there.
First, let's start with the original deal. Back in April 2019 (which feels like another lifetime) Canopy Growth said it was acquiring Acreage in a deal valued at $3.4 billion. In actuality, there was no price placed on the deal, but the figure was calculated based on share prices at the time. Once the shareholders and the Canadian Supreme Court approved the deal, Acreage Holders would immediately receive a payment of US$300 million or approximately US$2.55 per Acreage Subordinate Voting Share.
While there were many moving parts to this acquisition, the biggest issue was the "triggering event." The acquisition wouldn't take place until the U.S. federally legalized cannabis. This could happen a year from now or five years from now. Perhaps cannabis is only decriminalized and remains a highly scheduled drug? It's a big question mark.
Plus, these companies are based in different countries with varying levels of shareholder ownership and voting rights. Add in the inclusion of Constellation Brands (STZ) , which is a major stakeholder in Canopy and it becomes more complicated.
Jonathan Sherman and Jamie Litchen, partners at Cassels Brock who acted on the Acreage transaction for Canopy Growth, said at the time, "Canopy Growth's acquisition of Acreage Holdings is the most complex M&A transaction completed in decades. In this deal, one company has conditionally acquired another to be able to operate outside of a jurisdiction whereby the product or service would be considered legal."
Deal Excitement Cools
The original deal was agreed to by Bruce Linton, who was Canopy's CEO at the time and was very interested in acquiring U.S. assets. However, shortly after Linton was fired from Canopy in July 2019. An unnamed source says that once Linton was out of the picture at Canopy, there was little appetite for the Acreage deal. This is completely understandable as Canopy had its own problems to solve, much less take on a U.S. company and its issues as well.
In December 2019, Canopy appointed its new CEO David Klein, who faced a mountain of work ahead of him to navigate the company through an landscape of market right sizing. In 2020, the company has written down millions of dollars in losses and has laid off over 500 employees. It has shuttered two facilities in British Columbia and taken a loss on $132 million worth of obsolete inventory.
Acreage Holdings also has taken some time to pivot in its strategy. Early in the company's history, the goal was to be the biggest cannabis company with the most states under its belt. That was all fine and good when the access to capital was easy. However, investors began to tighten the purse strings and the strategy was no longer working. Making a profit became the new rallying cry. Underperforming assets have been sold and the company has adopted what has proven to be a winning strategy in cannabis -- zero in on specific markets where there are a lot of customers and the competition is manageable.
New Green Deal
Once Klein had Canopy on the right path, he could turn his focus to Acreage. Rather than back out of the deal, Canopy offered a new solution to what is now a radically different cannabis business environment. CEO Kevin Murphy left his position, but remains on the board and is still a major shareholder in the company.
Instead of paying the shareholders $300 million, they would now get $37.5 million (approximately $0.30 per Existing Share on an as-converted basis). The money went directly to them and not to Acreage itself.
Canopy would now only buy 70% of the company at a fixed price, but the remaining 30% would be allowed to move with the market. The idea behind the floating shares was that the Canopy shareholders should be able to participate in any upside in the stock, should that happen. Canopy can decide to buy these shares if the triggering event happens or they decide to waive that condition.
ACRGF: Old symbol. Delisted. No longer trading.
ACRHF: Fixed shares. 70% of Acreage that Canopy is obligated to buy at 0.30xx.
ACRDF: Floating shares. 30% of Acreage that Canopy has the option to buy at 30-day VWAP (volume-weighted average price) or $6.42, which is higher.
For now, the new shares are listed in the pink sheets at the OTC as new paperwork is prepared and approved. They are expected to move back into the higher OTC market groups.
Further complicating the two share classes is that it seems retail investors prefer the fixed shares. They are assured that Canopy will buy these shares. The floaters are only an option to buy. Retail buyers fear Canopy could change its mind and not buy the other 30%. However, analysts have been covering the floating shares for their basis of valuation. So, when an investor reads an analyst report, it is based on the floaters not the fixed shares.
It also looks like the relationship is back on track. The two companies have said they are going to roll out a new beverage line in the summer of 2021. It will combine the product expertise from Canopy with the reach of Acreage in the U.S. As so many deals in cannabis have ended in acrimony, it might be a lesson for much smaller cannabis companies on how to salvage a deal where both parties still benefit.
It is certainly creative thinking for the financial world.