5 Things To Know About Canopy Growth's Purchase Agreement With Acreage Holdings – The Motley Fool

Reports from unnamed sources are not always visible. So when Bloomberg and CNBC published Wednesday stories that a Canadian cannabis society Cover growth (NYSE: CGC) was in talks to acquire a US operator Surface Fund (NASDAQOTH: ACRGF)there remained some uncertainty as to whether an agreement would actually be concluded.

This uncertainty was lifted Thursday morning when Canopy Growth confirmed its intention to acquire Acreage for $ 3.4 billion. Canopy co-founder and CEO Bruce Linton acknowledged that the acquisition of the American company was a "complex deal".

He is right. Here are five things you need to know about the complex Canopy operation.

Source of the image: Getty Images.

1. This is not an acquisition – yet

At present, Canopy Growth does not really acquire Acreage Holdings. Why? As long as marijuana remains illegal at the federal level in the United States, Canopy can not do so and retains its stock on the New York Stock Exchange (NYSE) and the Toronto Stock Exchange (TSX).

Instead, Canopy Growth buys the right Buy Acreage when the production and sale of marijuana becomes legal in the United States. If such legalization never becomes a reality, Canopy will not actually acquire Acreage Holdings.

2. Canopy Growth will not use too much money

Thanks to the $ 4 billion investment made by Constellation Brands (NYSE: STZ) Last year, Canopy Growth rests on a boat full of money. However, the company will not have to use too much money for the Acreage Holdings transaction.

Canopy will pay $ 300 million in advance for the right to acquire Acreage later. Assuming that the United States is revising their federal marijuana laws sometime in the future, Canopy would then fund the acquisition with shares. Shareholders of Acreage would receive 0.5818 common shares of Canopy Growth for each Acreage share they held at the time of closing.

The total price of the acquisition is estimated at $ 3.4 billion, which corresponds to a premium of 41.7% on the 30-day volume-weighted average price of Acreage Holdings shares.

3. Several obstacles remain to be overcome

This is not done yet. The shareholders of both companies must first approve the transaction. And if only a simple majority of Canopy Growth's shareholders vote in favor of the proposed acquisition, at least two-thirds of Acreage's shareholders must endorse the deal.

In addition, the usual financial obstacles must be removed. More importantly, regulators in Canada and the United States will need to approve the transaction.

4. This influences the path Constellation follows to control canopy growth

This transaction does not affect Canopy Growth and Acreage Holdings. This will also have an impact on Constellation Brands. As it stands, Constellation holds mandates that, if exercised, would give it a majority interest in Canopy Growth. These mandates were originally expected to expire over a period of three years.

However, as part of Canopy's planned acquisition of Caneage, Constellation and Canopy have revised their original agreement. Constellation's mandates in Canopy now range from five to eight years. And if Canopy exercises its right to acquire Acreage and Constellation exercises all its mandates, Constellation's participation in Canopy should not exceed 50%. However, Constellation will retain its seat on Canopy's board of directors and will continue to have significant influence over the marijuana growers' business and strategy.

5. Why Canopy Growth Do It Now?

Why did not Canopy Growth just wait until it could actually acquire Acreage? There are probably two main reasons.

First of all, Canopy wants to be able to move at the speed of light if and when the day comes when marijuana will be legal at the federal level in the United States. The structure of his contract with Acreage allows this quick action.

Second, Canopy executives believe that US legalization is imminent. During the third quarter teleconference of Canopy in February, Bruce Linton said that US laws could change rather quickly.

The prospects for legalization of marijuana in the United States certainly look better than ever. The Law on Strengthening the Tenth Amendment through States (STATES), which would recognize the legalization of cannabis by the federal government in states that have already done so, was introduced in the House of Representatives and in the Senate US. With Democrats controlling the House, the passage of the law to the House seems likely. This could create tremendous pressure on the GOP to allow for a vote on the STATES law in the Senate.

There is no guarantee that this will happen, of course. But Canopy Growth would not claim more than $ 300 million to acquire the right to acquire Acreage Holdings if the likelihood of future changes to federal marijuana laws in the United States was not very high.