3 Wacky Facts About The Largest Canopy Growth Acquisition In The History Of Marijuana – The Fool Motley

Do not blink, because if you do, you could miss a big news in the rapidly evolving marijuana industry. Since the beginning of 2018, it is a kind of escalating war between pot stocks in North America, as a result of the legalization of recreational grass in Canada and legalization. ongoing cannabis in the United States.

With Wall Street predicting that its annual sales would be $ 50 billion (or more) by 2030, it is not surprising to see investors rush into marijuana stocks and that these marijuana stocks are spending heavily for to engulf as much as possible. But nobody was probably prepared for the bomb Cover growth (NYSE: CGC), the largest publicly traded pot stock in the world by market capitalization, fell on investors last week.

Three proposals to remember from the unique agreement of Canopy Growth

On the afternoon of April 18, while the stock market was still open, Canopy Growth announced that it had obtained the right to acquire Surface Fund (NASDAQOTH: ACRGF), a vertically integrated cannabis company in the United States, for $ 3.4 billion, if the US federal government legalized marijuana. Assuming the deal is successful, it would become the largest acquisition in history, easily exceeding about $ 2 billion. Aurora Cannabis (NYSE: ACB) paid to acquire the pot growers from Ontario, MedReleaf This would also allow Canopy to access all 20 states (including pending acquisitions). Acreage currently holds licenses for retail, production or processing operations.

Under the terms of the agreement, Canopy will pay Acreage's shareholders an initial cash payment of $ 300 million, or $ 2.55 per share, with the balance converted into common shares at an exchange rate of 0.5818. Canopy shares for every Acreage share held. . Overall, this represents a premium of almost 42% over the 30-day volume-weighted average price of the Acreage common shares, closed on April 16. If Acreage were to withdraw from the transaction, a termination fee of $ 150 million would be due.

All of this may seem relatively simple, but it's one of the most complex acquisitions in history you've ever seen. Here are the three craziest recipes of this innovative deal.

1. Contingency transactions of this magnitude are unheard of

First, let's start with the obvious: this contingent agreement is different from anything we've seen before. For example, acquisitions of pharmaceuticals or biotechnology contain from time to time a right to a potential value that pays a little more to shareholders of the acquired company if the development, regulatory or sales stages are met for certain drugs in development. the Bristol-Myers Squibb redemption of Celgene contains a CVR of $ 9 per additional share that could be paid to Celgene's shareholders if Celgene's three separate development drugs met certain milestones.

However, there is a big difference between paying a cherry on the cake for an already accepted acquisition and basing the entire acquisition on the premise that the US federal government must legalize the pot. This could be something that happens in a few months, years from now or never. Granted, this could potentially help secure Area at a very low price for Canopy if the US weed industry grows, but there is no guarantee that it will happen.

There are also legal aspects surrounding Canopy's entry that do not resemble anything we've seen before. Co-CEO Bruce Linton had previously said that his company would not enter the US cannabis market, or any other country, until federal policy allows legalization of marijuana.

In addition, reputable stock exchanges, such as the New York Stock Exchange, where Canopy trades, do not allow companies that directly trade cannabis in the United States to list their shares on this stock exchange. That's why so many pot stocks have not been able to go back to the NYSE or Nasdaq. This rule may have been one of the many factors that have complicated the agreement between Canopy and Acreage.

2. This will result in massive dilution for Canopy Growth shareholders

The second crazy aspect of this landmark agreement lies in the fact that it has a massive sharing component.

On the one hand, I understand why Canopy Growth has chosen to fund the bulk of this deal with its common shares. Given that the acquisition is essentially dependent on the legalization of marijuana in the United States and the lack of a clear time frame for when this could happen, I can understand why Canopy does not want to block much of the cash flow. and cash equivalents of $ 3.7 billion. he finished the third fiscal quarter with. He still needs this money to make further acquisitions, develop new products, market his brands and build the infrastructure needed to enter new international markets. This last element will be extremely important if and when the Canadian dried cannabis flower becomes overfed and unmarked, as it has been the case in some American states that have legalized recreational grass.

Nevertheless, financing more than 90% of Canopy's common stock transaction would mean an increase of more than 20% in the number of its shares, depending on the amount of stock-based compensation and additional acquisitions made by Canopy between now and the moment (or if the surface contract passes Yes, this initiative allows Canopy to penetrate a much more lucrative market, but it is also likely that the shareholders then in office would suffer in the short term because the number of outstanding Canopy shares increased considerably.

3. Aurora Cannabis could lose its place as the world's leading producer of jars

Last but not least, if the contract between Canopy and Acreage was concluded, it could eventually dethrone Aurora Cannabis as the world's largest cannabis producer.

Prior to this agreement, Canopy Growth had over 4.4 million square feet of licensed crop space on 5.6 million square feet of growing space. Assuming the company produces marijuana at average rates in the industry, it should be able to produce between 500,000 and 550,000 kilograms a year. What we do not know is the square footage that Acreage brings to the United States. However, with operations in 20 US states, this is expected to significantly increase Canopy's global footprint.

In comparison, Aurora Cannabis is in the process of producing 780,000 kilos per year by 2021 or 2022. Aurora is actively acquiring production capacity since the beginning of last year, engulfing MedReleaf, CanniMed Therapeutics and ICC Labs for $ 2 billion, $ 850 million and $ 200 million, respectively. A little over a week ago, it announced that its largest organic production facility, Aurora Sun, located in Medicine Hat, Alberta, would be expanded to 1.62 million square feet. space of cultivation, which would produce a minimum of 230 000 kilos. Even with this expansion, the Canopy acquisition could put it ahead of Aurora.

In addition, the company resulting from the merger would put Aurora Cannabis out of the water from the point of view of total sales. Currently, Aurora is expected to be in first place in the consensus revenue rank for 2020, while Canopy Growth is the third. But with Acreage in fourth place, the merged company would overtake Aurora Cannabis.

This acquisition changes the situation … if it goes through.