(Bloomberg) -- Canopy Growth Corp. agreed to buy Acreage Holdings Inc. for $3.4 billion in a cross-border cannabis deal that’s conditional on the U.S. eventually legalizing pot for recreational use.

Canopy, the world’s largest pot company, will initially pay $300 million in cash to shareholders of New York-based Acreage, the companies said in a release Thursday. Shareholders will receive a further 0.5818 of a Canopy share when cannabis becomes federally legal in the U.S., representing a 42 percent premium over Acreage’s 30-day average price.

Acreage, which boasts former U.S. House Speaker John Boehner and former Canadian Prime Minister Brian Mulroney as directors, will also have access to Canopy’s pot brands like Tweed and Tokyo Smoke and other intellectual property.

Canopy is making a major bet that the U.S. will scrap its federal prohibition of the drug. The Canadian firm won’t have an active say in Acreage’s operations until the U.S. legalizes pot at the federal level. The structure mirrors Canopy’s stake in TerrAscend Corp., which also has cannabis operations in the U.S.

“Our right to acquire Acreage secures our entrance strategy into the United States as soon as a federally permissible pathway exists,” Canopy Chief Executive Officer Bruce Linton said in a statement. “By combining Acreage’s management team, licenses and assets with Canopy Growth’s intellectual property and brands, there will be tremendous value creation for both companies’ shareholders.”

Canopy Rallies

Canopy, based in Smiths Falls, Ontario, rose 7.4 percent in trading in New York.

Acreage went public on the Canadian Securities Exchange in November and is now among the largest U.S.-based pot firms with a market value of about $2.6 billion. It has cultivation, processing and dispensing licenses or agreements with holders in 19 states and manages a chain of retail stores called the Botanist.

“Having access to Canopy Growth’s deep resources will enable us to innovate, develop and distribute quality cannabis brands across the U.S. and continue expanding our U.S. footprint,” Acreage CEO Kevin Murphy said in the statement.

The transaction is subject to the approval of shareholders of both companies.

Canopy has been looking for an entry point into the U.S. pot market but is restricted by its listings on the Toronto Stock Exchange and the New York Stock Exchange, both of which prohibit trading by companies that are violating U.S. federal law. Canopy also has a high-profile investment from Constellation Brands Inc., the Victor, New York-based alcohol giant that makes Corona beer.

Canopy said Thursday it and Constellation Brands will extend the terms of certain warrants and other rights as part of the arrangement.

The U.S. marijuana market is expected to be worth $22 billion by 2022 compared to a Canadian market that will reach $5.9 billion in 2024, according to Arcview Market Research and BDS Analytics.

Canopy has been one of the top-performing stocks in Canada this year, surging 56 percent to Wednesday’s close. It has a market value of C$20.7 billion ($15.5 billion).

--With assistance from Craig Giammona.

To contact the reporter on this story: Kristine Owram in Toronto at kowram@bloomberg.net

To contact the editors responsible for this story: Brad Olesen at bolesen3@bloomberg.net, David Scanlan, Jacqueline Thorpe

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