The ripple effect of Canopy's deal for Acreage
A week ago, the cannabis industry rumbled following Canopy Growth Corp.’s (WEED.TO) plans to acquire the right to buy U.S. marijuana operator Acreage Holdings Inc. (ACRGu.CD) for US$3.4 billion, the first major deal between a Canadian cannabis player and a U.S. counterpart.
Prior to Canopy’s blockbuster announcement, Canadian pot companies that traded on the Toronto Stock Exchange or the New York Stock Exchange were effectively shut out from owning or operating any U.S. assets due to restrictions put in place by the exchanges.
Canopy was able to pull the trigger by making most of the purchase, paid in the Smiths Falls, Ont.-firm’s shares, contingent on cannabis becoming legal at the federal level in the U.S.
Acreage’s CEO Kevin Murphy told BNN Bloomberg the deal will likely be completed once the Strengthening the Tenth Amendment Through Entrusting States (STATES) Act is passed by U.S. legislators, which would allow states to craft their own policies on cannabis.
Canopy’s deal effectively changes the game for Canadian pot companies, which now appear to have an established pathway into the world’s biggest cannabis market.
“We expect other large Canadian [licensed producers] will follow this strategy as the U.S. cannabis market rapidly develops,” said Jason Zandberg, an analyst at PI Financial.
BNN Bloomberg spoke to several U.S. cannabis operator CEOs during a cannabis conference hosted by GMP Securities last week before the Canopy-Acreage deal was announced, and inquired about whether they would be interested in expanding their operations outside U.S. borders alongside a Canadian firm. The companies were also given the opportunity to amend their responses on any potential international deals, but none opted to update their comments.
Joe Lusardi, chief executive officer of Curaleaf Holdings Inc., one of the largest U.S. cannabis companies, told BNN Bloomberg he remains focused on building out operations in the U.S.
“We are continuing to try to figure out where the puck is going, not where it is,” Lusardi said.
“We're looking into a lot of different areas where we can grow our business. But fundamentally the U.S. is the best market in the world and so that's we're going to focus. Frankly, I think that due to the federal conflict, Canadians have been reluctant to invest in the U.S. They're looking to exploit other world markets, but I don't feel the need to do it because we think we're in the best market in the world.”
Harvest Health and Recreation Inc. Chief Executive Officer Steve White acknowledged that investors’ focus may not remain centered on the U.S., but that’s where the biggest opportunity lies and that’s where the company intends to remain at present. The Phoenix-based cannabis producer recently said it would acquire Chicago’s privately-held Verano Holdings for US$850 million, which prior to the Canopy announcement, was the biggest acquisition of a U.S. cannabis company thus far.
“We see other countries … as great for other people but a distraction for us,” White told BNN Bloomberg. “For us, we've been very clear about what our strategic imperatives are and that is developing the largest wholesale and retail footprints in the United States.”
Chicago-based Cresco Labs Inc., which recently acquired Canada’s Origin House for $1.1 billion, reported fourth-quarter results on Wednesday with US$17 million revenue and an adjusted EBITDA (earnings before interest, tax, depreciation and amortization) of US$13.7 million, compared to US$3.3 million in revenue and an adjusted EBITDA loss of US$3.1 million a year earlier. While those figures still pale in comparison to some Canadian players, Cresco’s CEO Charles Bachtell said he would welcome any competition from Canada’s pot giants.
“The way I look at that is, the second that they're actually able to execute and come into the U.S. will be the same second that I'm able to access the U.S. capital markets. So, I'll take that trade,” Bachtell said.
White noted that the Canadian cannabis companies were likely to be working out ways to enter the U.S., given the relative valuations between U.S. and Canadian pot firms mean potential all-stock deals make sense.
“I realize there are lots of impediments to that, namely it's federally illegal in the U.S.,” White said. “And if you're listed on a major exchange, you've got to get really smart about how you structure that that opportunity. But the really smart guys are going to figure it out.”
However, one chief executive of a U.S. cannabis operator who declined to be named made an interesting observation following the Canopy-Acreage announcement. The CEO, who declined to speak on the record as he doesn’t want to risk future M&A opportunities, said the structure introduced by Canopy to enter the U.S. signalled to the market that any company can now target deals with U.S. pot companies, not just Canadian firms.
“There’s nothing here to say that any other company can’t get into this space,” the CEO said. “Why would you take [stock] from a company like Aurora Cannabis or Cronos Group? Or you could wait and do a deal with Coca-Cola or Diageo.”
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