Canopy’s proposed U.S. deal is a boon for the U.S. cannabis sector, says this investor
Canopy Growth Corp.’s plan to acquire U.S. multistate operator Acreage Holdings Inc. as soon as cannabis is legalized in the U.S. has won the support of a U.S. private-equity firm that specializes in investments in the cannabis sector.
Matt Hawkins, managing partner of Cresco Capital Partners LLC, said Thursday that the $3.4 billion proposed deal is the “most significant” as well as the biggest deal in the sector so far, and brings a much needed infusion of capital to an industry that is starved of cash.
“As one of one of the best capitalized companies in the industry, Canopy GrowthCGC, -3.80%WEED, -3.62%has introduced a creative structure to potentially gain a foothold in the United States, the most lucrative global cannabis market,” Hawkins wrote in a letter to his own investors. “From an Acreage perspective, it now has 58 million shares of Canopy Growth injected in the company to continue to make strategic acquisitions and expand across the country.
“In an industry where capital still costs a premium, this infusion is a tremendous differentiator.”
Hawkins was responding to the biggest critic of the deal, activist shareholder Marcato Capital Management LP, which came out against it immediately after its initial announcement by saying it substantially undervalues Acreage Holdings. Marcato owns a 2.7% state in Acreage’s subordinated voting shares.
In an open letter to Acreage’s board published in early May, Marcato called the offer “value destructive” and lower than the company’s fair value, based solely on the present value of its future cash flows.
“We believe Acreage’sACRGF, -3.64%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,” said the letter. “Furthermore, we believe enterprise values of cannabis companies will skyrocket upon the relaxation of current Federal restrictions.”
Hawkins acknowledged that his firm stands to benefit significantly from the deal as it was an early investor in Acreage, taking a stake when it was still private and named High Street Capital Partners. Cresco started investing in the cannabis sector in 2014, when valuations were much lower than they are today.
“There’s an inherent difference of opinion on what the value creation is, but that $3.4 billion number should be applauded, regardless of when you came in,” he told MarketWatch.
See also: Canopy Growth stock climbs on news of U.K. skin-care deal; Hexo names COO
Because cannabis is still banned at the federal level, U.S. companies are unable to bank or tap capital markets, relying instead on private investments from high-net-worth investors, family offices and private-equity firms, along with retail investors.
As the first G-7 country to fully legalize the substance last October, Canada is enjoying a first-mover advantage and access to financing, some of which can now trickle south of its border through a deal like Canopy’s, according to Hawkins.
The Canopy deal is structured as an option that gives it the right to take over Acreage once a federal pathway to legal status for cannabis companies exists, as Chief Executive Bruce Linton has explained. Canopy, which has a $4 billion investment from Corona beer parent Constellation Brands Inc.STZ, +0.38% , cannot buy a U.S. cannabis player outright because of the federal ban, which would place it in breach of both Toronto Stock Exchange and New York Stock Exchange rules, both of which bar listed members from running illegal operations. The company is listed on both exchanges.
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Hawkins said the desired pathway could come with the passage of one or other of two bills that are currently being considered in Washington. The Secure and Fair Enforcement (SAFE) Banking Act is a bipartisan bill introduced in March that would protect banks and their employees from liability for federal prosecution when servicing cannabis companies; the Strengthening the Tenth Amendment Through Entrusting States (STATES) Act would give each state the right to determine its own approach to cannabis legislation.
For more, read: Push for legislation allowing banks to serve the cannabis business is gaining momentum
“We don’t have intel from [Canopy], but our interpretation is that whether it’s the SAFE Act or the STATES Act, it should be enough to trigger the deal,” Hawkins said.
“While none of us have a crystal ball, and many wonder how this deal will unfold, we believe the focus should be on the benefits to the industry and the even greater force the combined company will become,” he said.
Canopy shares have gained 71% in 2019, while the Horizons Marijuana Life Sciences ETFHMMJ, -3.04%has risen 42% and the ETFMG Alternative Harvest ETFMJ, -2.74%has gained 37%.
The S&P 500SPX, -1.55%is up 14%, and the Dow Jones Industrial AverageDJIA, -1.54%has risen 11%.
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