Cannabis stocks rallied on Thursday, boosted by the news that the biggest company in the sector by market cap has bought the rights to acquire a U.S. multistate operator as soon as the federal ban on cannabis has been lifted.
Canada’s Canopy Growth Corp., with its $4 billion treasure chest courtesy of an investment from Corona beer distributor Constellation Brands Inc. STZ, +3.71% said it has bought the rights to acquire New York-based Acreage Holdings as soon as cannabis has been fully legalized in the U.S. in a mostly stock deal.
“Today we announce a complex transaction with a simple objective,” Canopy Chief Executive Bruce Linton said in a statement. “Our right to acquire Acreage secures our entrance strategy into the United States as soon as a federally-permissible pathway exists.”
Canopy shares soared more than 8% after it confirmed the deal, which MarketWatch reported on late Wednesday. Once the rights have been exercised, the deal will be valued at $3.4 billion, a 41.7% premium over the 30-day volume weighted average price of the Acreage subordinate voting shares on the CSE ending April 16, Canopy said in a statement.
The companies will also enter a licensing deal that would grant Acreage access to some of Canopy’s well-known brands, including Tweed and Tokyo Smoke, along with other intellectual property.
Canopy CGC, +7.84% , WEED, +8.28% is the most highly valued company in the cannabis sector with a market cap of more than $15 billion. The company cannot outright buy a U.S. company for now, because it would run afoul of the rules for the Toronto Stock Exchange, where its shares are listed. The TSX doesn’t allow companies to own stakes in businesses that run illegal operations, which New York-based Acreage technically does because marijuana is still federally illegal in the U.S.
Canopy would also have to give up its U.S. listing, which was cross-listed from the TSX, and instead look to the Canadian Securities Exchange and over-the-counter trading in the U.S., as publicly-listed U.S. companies do.
Jefferies analyst Owen Bennett said the move is a positive for Canopy and that it has likely secured a far better price than it would likely pay if it waited for the federal ban to be lifted.
“The U.S. is the world’s biggest market by far,” Bennett wrote in a note. “Our current (cautious) estimates on a 10-year DCF (discounted cash flow) give the U.S. an EV (enterprise value) of $60 billion vs. the international opportunity of $30 billion. As we wrote in our initiation, if our coverage LPs (licensed players) want to move on to large-cap status they need a US presence.”
The deal also shows that Canopy is driving real value from its Constellation investment, which is key given the difficulty facing cannabis companies in tapping the capital markets, he wrote. Bennett has a hold rating on Canopy stock.
Piper Jaffray analyst Michael Lavery agreed. “We continue to believe differentiated branded products are key to long-term success, and this appears to be a much more significant opportunity in the US than in Canada.” Lavery has an overweight rating on the stock.
At Cowen, analysts said Canopy is gaining access to a company with one of the largest geographic footprints in the U.S., and is only spending $300 million of its war chest in cash to do so.
“The company is also among the best connected politically, with the Board of Directors including former Speaker of the House John Boehner and a current candidate for the Republican nomination for President of the United States,” they wrote in a note. That candidate is William Weld, the Republican former governor of Massachusetts, who has confirmed his plan to challenge President Donald Trump in the 2020 primary.
See now: John Boehner is joining a marijuana company
“These relationships will likely prove helpful in pushing for a change in U.S. laws surrounding cannabis, and in particular marijuana, which remains a Schedule I controlled substance,” said Cowen.
Acreage earlier unveiled a deal of its own, a $120 million stock-and-cash acquisition of Deep Roots Medical LLC, a Nevada-based vertically integrated cannabis operator. Deep Roots has 18,000 square feet of indoor flowering canopy for high end flour, a manufacturing facility that can produce distillates and edibles and four brands. It has licenses to operate seven retail dispensaries in Nevada and California. Acreage shares rose 8.8%.
Greenlane Holdings Inc. GNLN, +38.24% a maker of cannabis vape hardware and accessories, enjoyed strong gains in its trading debut with the stock rocketing 40% in early trade. Greenlane priced its initial public offering late Wednesday above its price range and increased the size of the deal. The company sold six million shares at $17 a pop to raise $102 million. The shares are trading on Nasdaq, under the ticker symbol “GNLN.”
For more, see now: Greenlane IPO: 5 things to know about the closest thing to a U.S. cannabis company to go public on Nasdaq
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Elsewhere in the sector, Cronos Group Inc. CRON, +2.14% CRON, +2.44% was up 3.5%, Aurora Cannabis Inc. ACB, +1.28% ACB, +1.42% was up 1.0%, and Tilray Inc. TLRY, -2.95% was down 1.0%.
Hexo Corp. HEXO, +2.40% was up 2.5%, Green Organic Dutchman Holdings Ltd. TGODF, +0.26% TGOD, +0.25% was gaining 0.3%. CannTrust Holdings Inc. CTST, -2.20% TRST, -1.66% was flat and GW Pharmaceuticals PLC GWPH, -0.78% was down 0.8%.
Aphria Inc. stock APHA, -1.79% APHA, -2.48% was down 1.2% and Aleafia Health Inc. ALEF, +4.24% ALEF, +4.24% was up 3.7%. OrganiGram Holdings Inc. OGRMF, +0.96% OGI, +0.79% was up 0.7%.
Read: Tilray stock rises after the company shows it can sell recreational pot
The Horizons Marijuana Life Sciences ETF HMMJ, +1.14% was up 1.6%, and the ETFMG Alternative Harvest ETF MJ, +0.09% was up 0.9%.
Meanwhile, the Dow Jones Industrial Average DJIA, +0.42% was up 0.2%, while the S&P 500 index SPX, +0.16% was down 0.1%.
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Cannabis Watch: All of MarketWatch’s coverage of cannabis companies
Additional reporting by Tomi Kilgore, Max Cherney and Jeremy Owen
