David George-Cosh

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Canopy Growth Corp. (WEED.TO) plans to acquire U.S. marijuana operator Acreage Holdings Inc. (ACRGu.CD) in a blockbuster deal that would create a North American cannabis powerhouse - but only when it becomes legal to do so. 

The deal, which is believed to be the first of its kind, ties up two major cannabis players in the U.S. and Canada in an arrangement that will only be consummated when ​U.S. federal law formally recognizes the states that have legalized marijuana. That milestone would allow pot companies listed on the Toronto Stock Exchange, which currently restricts issuers from owning assets in jurisdictions where marijuana isn't legal, to acquire cannabis assets in the United States.

Under the terms of the agreement announced Thursday, Canopy will make a US$300-million payment once the arrangement is approved by shareholders. If Canopy exercises its right to proceed with the takeover, Acreage shareholders will receive 0.5818 of a Canopy share for each share held. The total value of the agreement is US$3.4 billion.

Canopy will also provide Acreage with the ability to market its various brands including Tweed and Tokyo Smoke along with other intellectual property.  

The acquisition "means everywhere we have to be, we'll be there with a leading position," said Bruce Linton, chief executive officer of Canopy Growth, in an interview with BNN Bloomberg.

Bloomberg News was first to report discussions between Canopy and Acreage Wednesday afternoon, citing people familiar with the matter. 

Canopy shares rose 4.43 per cent, or $2.53, to end the trading day at $59.64 on the Toronto Stock Exchange. The company’s New York-listed shares were up 3.9 per cent, or US$1.71, to US$44.56. Acreage shares closed 14 cents lower at $22.35 on the Canadian Securities Exchange.

Once Canopy is allowed to acquire Acreage, the Smiths Falls, Ont.-based company would have access to at least 20 U.S. states - a market currently valued around US$17 billion - where Acreage operates to sell its range of dried cannabis products as well as pot-infused edibles and extractables such as its upcoming beverage line.

The tie-up with Acreage would mark another major breakthrough for Canopy less than a year after Constellation Brands Inc. made a $5-billion investment for a 38 per cent stake in the Canadian pot producer. Constellation’s investment – which also includes warrants that could push its stake to a controlling interest – remains the biggest such deal in the marijuana space. 

"The game has changed again," said Linton. "This gives us a global platform with all key markets and still a lot of cash in the bank to do a lot more." 

He added the deal's structure has been vetted by U.S. and Canadian regulators and stock exchanges where "it would not step on any lines that would cause them to enforce anything."  

Scotiabank analysts Oliver Rowe and Ben Isaacson said in a report to clients Wednesday that​ ​​​Canopy's move to invest in the U.S. market is "the most appealing right now and the best current use of capital."

Acreage counts notable politicians including former Prime Minister Brian Mulroney, former Speaker of the United States House of Representatives John Boehner, and former Massachusetts Governor Bill Weld on the company's board. All three are expected to remain with the firm until it is acquired by Canopy, Linton said. 

Acreage reported revenue of US$21.1 million in its fiscal 2018 while posting a net loss of US$219.7 million. In its fiscal 2017, Acreage generated US$7.7 million in sales with a net loss of US$7.6 million. With 87 dispensaries - and an additional 30 expected by the end of the year - in 20 states, it also has one of the widest geographic footprints among all U.S. cannabis operators.

"It allows us to tie-up and really work together with a dominant player globally," said Kevin Murphy, chief executive officer of Acreage, in an interview with BNN Bloomberg. "We had to look beyond the U.S. border and Canopy was just an obvious choice for us given everything they've accomplished to date." 

Murphy said Constellation's investment in Canopy would give Acreage a "tremendous financial advantage" that allows it to spend hundreds of millions of dollars on new cannabis products. Acreage will operate independently until the deal is finalized, he added. 

"All we want to do is leverage off of the enormous stride that Canopy has achieved with its partner in Constellation," Murphy said.  

He added the deal will likely be completed once the Strengthening the Tenth Amendment Through Entrusting States (STATES) Act, which was introduced in Congress earlier this month and would allow states to craft their own policies on cannabis while resolving any existing issues between federal and state law, is passed by U.S. legislators. Political observers are expecting another pot-focused piece of legislation, the Secure and Fair Enforcement (SAFE) Banking Act, which removes restrictions for banks to work with cannabis firms, to be passed into law first.  

Canaccord Genuity cannabis analyst Matt Bottomley said in a report to clients last month that Acreage's focus on cannabis brands, notably through its investment in Dixie Brands Inc., could distinguish it from other major U.S. pot companies.  

"[Acreage] management has taken a strong consumer branded approach, which includes a uniform retail design; vertically integrated branded product offerings; and through its acquisition of Form Factory, which will be utilized as a springboard to launch brands at a national level," wrote Bottomley, who has a US$35 price target on Acreage's stock with a "speculative buy" rating. 

Given the unique structure of the takeover, Linton said he wouldn't be surprised if other Canadian companies conduct similar deals. He added that he's approached six other U.S. cannabis companies for a similar transaction and talks are advancing with half of them. 

"This one took a lot more head scratching and contemplation to get to the right spot," Linton said. 

Cannabis Canada is BNN Bloomberg’s in-depth series exploring the stunning formation of the entirely new – and controversial – Canadian recreational marijuana industry. Read more from the special series here and subscribe to our Cannabis Canada newsletter to have the latest marijuana news delivered directly to your inbox every day.