25 Apr Acreage Holdings – “On a High” with news of Acquisition by Canopy Growth
The Canadian cannabis behemoth Canopy Growth Inc (NYSE:CGC), a global leader in diversified cannabis and hemp related products, entered into a definitive agreement with Acreage Holdings, Inc (OTCQX: ACRGF) that bestows it with the right to acquire 100 percent of the company’s shares at such time as cannabis production and sale becomes federally legal in the United States, subject to shareholder approval.
Acreage will receive an upfront US$300 million or approximately US$2.55 per Acreage Subordinate Voting Share, with the entire transaction being valued at US$3.4 billion, a 41.7% premium over the 30-day volume-weighted average price of Acreage Holdings shares.
The deal will enable Canopy to secure an entrance into the US cannabis market once it is legalized. The formidable management team, licenses and assets of Acreage when combined with Canopy’s intellectual property and brand value will create a remarkable shareholder value.
Unraveling the Potential of CBD
A report by Grand View Research, predicts that the global legal marijuana market will be worth over USD 146.4 billion by 2025. The same report pegs the U.S market size at USD 7.06 billion in 2016 which will grow at a CAGR of 24.9% from 2017 to 2025. Medical marijuana alone will be worth USD 100.03 billion by 2025.
The Cannabis plant has an estimated 113 different compounds out of which THC and CBD are the two main constituents. These affect the receptors in the brain to alter an individual’s physical and mental state. THC is mainly responsible for the psychoactive effects or the feeling of “high” caused by the use of cannabis.
CBD on the other hand, has several powerful anti-inflammatory, analgesic, neuroprotective and anti-anxiety properties, which explains its growing popularity to treat a plethora of medical conditions. Unlike THC, CBD does not have any psychotropic effects and hence is widely preferred. It is increasingly being used to treat conditions such as cancer, cardiovascular anomalies, arthritis, anxiety, depression and insomnia. In addition, it has also been proven to possess neuroprotective benefits that can treat diseases such as Seizures, Multiple sclerosis (MS), Alzheimer’s, Parkinson’s and Schizophrenia to name a few.
In 2017, The WHO expert committee on Drug Dependence (ECDD) concluded that in its unadulterated form, CBD does not cause harm or have abuse potential. While further research is underway on the subject it has been proved that CBD is well tolerated in humans and is safe.
A survey conducted by Brightfield group, shows that 42% of CBD users ditched traditional medicine and a significant 80% of the CBD users rated these alternate medicine as extremely effective treatment. The same survey reveals that 90% of CBD users were likely to buy these products again.
What will Acreage Gain?
Acreage is a leading multi-state license aggregator and operator in the cannabis sector which holds 20 licenses across U.S. It has 12 operational licenses, out of which it is currently processing in 7 states. Though it holds licenses to operate 68 retail dispensaries in 12 states, 23 are operational in 11 states. These stores run under the brand name “The Botanist”.
The company has stores in Ohio, North Dakota, New Jersey, Massachusetts, California, Connecticut, Iowa, Maine, Maryland, New Hampshire, Pennsylvania, Oregon and Oklahoma in addition to four stores in New York, where it operates under the brand name NYCANNA along with a store in Queens.
It has an impressive wholesale and retail presence. It company’s broad has influential members such as former US House Speaker John Boehner, Bill Weld (former Governor of Massachusetts (R), Republican candidate for President) and Brian Mulroney (former Prime Minister of Canada), on its board. It has made a few strategic acquisitions in recent times, including that of Form Factory, Inc. a multi-state manufacturer and distributor of cannabis-based edibles and beverages, in an all-stock transaction valued at US$160 million, enabling Acreage to become the first national cannabis Consumer Packaged Goods (CPG) company. The company sees immense potential in the deal, with options ranging from building scalable proprietary brands and offering contractual manufacturing services to other established brands such as Nestle, Mars or Procter & Gamble.
Its subsidiary High Street Capital Partners, LLC acquired 100% of Deep Roots Medical LLC, a vertically integrated cannabis operator in Nevada, for $120 million in stock and cash in April 2019. It will allow the company to start its operations in Nevada, taking its footprint to 20.The company sells four brands Deep Roots, Chillers, Bluebirds and Helix Twist with presence in 80% of the retail dispensaries in Nevada.
Acreage will get access to Canopy’s substantial capital and intellectual property rights, which will help it gain access to newer markets, both at home and abroad and aid its expansion plans.
What does it Entail for Canopy Growth?
Canopy Growth Corporation formerly known as Twead Marijuana Inc., is a Canada-based Cannabis giant engaged in cultivation and sale of marijuana for medical purposes. The company offers dried flowers, oils and concentrates, softgel capsules, and hemps under the brand name Tweed, Black Label, Spectrum Cannabis, DNA Genetics, Leafs by Snoop, Bedrocan Canada, CraftGrow, and Foria. The company runs an online store named Tweed Main Street, which allows registered patients to purchase marijuana from producers across various brands.
Canopy has been eyeing the U.S market for a while now; it is backed by a $4 billion investment from Constellation Brands (STZ) and through them gained a license from the New York State to process and produce hemp and develop products containing Cannabinoid (CBD). The deal with Acreage however could be a game changer. Once the acquisition goes through, it will give rise to the largest Cannabis player in the market.
The proposed effectively guards Canopy against regulatory uncertainty in the U.S market, with the agreement only being finalized when marijuana is fully legalised. It also allows the company to acquire a storing foothold in the market at a great price as opposed to once legalization is announced allowing it to make a quicker foray into the market.
In the event of marijuana being legalized by the end of the year, as some observers predict, the company is fully ready to commence its operations immediately, it is investing in one of the biggest players in the U.S market and hence will be able to leverage on its established chain of dispensaries and licenses. It will gain access to Acreage’s 87 dispensaries and 22 cultivation and processing sites across 20 U.S States.
Currently 33 states in the U.S along with Washington, D.C. have legalized medical marijuana while 10 states (plus D.C.) permit recreational cannabis. 2018 was a great year for CDB industry, not only was the Farm Bill passed that allowed for the sale of hemp and hemp-based cannabidiol products, but the FDA also approved its very first cannabis-derived drug Epidiolex for treatment of seizures.
The call for reform for legalizing marijuana at the federal level is gaining momentum with research proving time and again the many benefits of cannabinoids in treatment of various physical and neurological conditions. We feel that there is a growing acceptance of cannabis as pointed out by a survey by Gallup in October 2018, which saw two out of three adults now favor legalizing weed nationally.
Acreage and Canopy will be able to leverage their combined might, if U.S federal laws legalize marijuana. However, there are a lot of hurdles to cross before that dream might become a reality. For starters the government currently charges very high tax rates on marijuana products under Section 280E of the U.S. tax code as it prevents corporate from taking normal corporate income tax deductions, as they are trading in a federally illicit substance, as defined by the Controlled Substances Act. Any changes in law will reduce the tax revenue for the government by almost $5 billion reduction over a 10-year period.
Also since it a class Schedule I substance, the potential for abuse is extremely high. The country is already battling an opioid crisis and may be very cautious with how it deals with marijuana.
Our advice would be to watch the regulation and policy changes keenly, as Acreage is very confident that Marijuana will most likely be legalized in 2019, as stated by Kevin Murphy, CEO of Acreage in January 2019.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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