Canadian weed giant Canopy Growth strikes $3.4 billion deal to buy Acreage after federal legalization

Key Points
  • Canadian marijuana grower Canopy Growth agrees to buy Acreage Holdings in a $3.4 billion deal after cannabis has been legalized in the U.S.
  • Canopy co-CEO Bruce Linton says the combination of production and brands with Acreage's U.S. licenses and management teams will generate value.
  • Though several U.S. states have approved the recreational use of marijuana in recent years, consumption of the plant remains prohibited by federal law.
Canopy Growth co-CEO on Q3 earnings and the future for the cannabis industry
Canopy Growth co-CEO on Q3 earnings and the future for the cannabis industry

Canadian marijuana grower Canopy Growth announced Thursday a $3.4 billion deal to acquire Acreage Holdings that will take effect after cannabis has been legalized in the U.S.

The deal, which was finalized Thursday morning in New York, grants Canopy the right to buy all of Acreage's stock following nationwide legalization; the two companies will operate independently until then. It will also grant Acreage access to Canopy vault of brands including Tweed.

"Today we announce a complex transaction with a simple objective. Our right to acquire Acreage secures our entrance strategy into the United States as soon as a federally-permissible pathway exists," Canopy co-CEO Bruce Linton said in a press release. "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's stock soared more than 8% Thursday following the announcement. The equity is up 70% since January.

New York-based Acreage Holdings is one of the largest multistate cannabis operators in the U.S. with a presence in 20 states. It bills itself as developing a consumer-centric branded cannabis product line and has leveraged board director and former Speaker of the House John Boehner in its efforts on Wall Street.

Questions remain on legalization

For its part, $14 billion Canopy Growth remains one of the largest players in the burgeoning cannabis industry. The company is perhaps best known in the U.S. for its partnership with Corona beer maker Constellation Brands and its plans to locate a hemp operations in New York State. It has announced partnerships with both Martha Stewart and Seth Rogen in 2019.

But despite the announcement, the deal still faces a number of important questions. Though several U.S. states have approved the recreational use of marijuana in recent years, consumption of the plant remains prohibited by federal law.

Even in states that have approved recreational use, national banks' moves to accept deposits or loan to cannabis businesses could make them vulnerable to a Department of Justice suit and the ire of the Food and Drug Administration. The FDA prohibits companies from adding active ingredients that are drug products in foods and drinks.

The deal could also put them at odds with the stock exchanges on which they're listed, which have their own policies about illicit business practices.

"Until now, the Nasdaq has not been willing to list companies that have U.S. 'plant touching' cannabis operations," said cannabis lawyer David Feldman, a partner at Duane Morris. "What's interesting is that they didn't tie this to Nasdaq, they tied it to legalization."

"It is interesting that they are limiting it to legalization, rather than completing the acquisition when TSX and Nasdaq are prepared to allow the listing," he added.

Awaiting key legislation

Some of that uncertainty was cleared up late last year, when the recent U.S. farm bill removed hemp from the federal government's list of controlled substances and opened up nascent markets in CBD, cannabidiol.

Questions remain, however, for those who want to sell or bank money from the marijuana business. Federal regulations currently deter banks from working with legal dispensaries in the U.S. and mandate that banks and other financial firms file "suspicious activity reports" to help monitor money laundering.

Acreage CEO Kevin Murphy told CNBC earlier this year that he believes that the STATES Act, if passed by Congress, should allow more flexibility for U.S. operators.

The STATES Act, a piece of bipartisan legislation proposed by Sens. Cory Gardner and Elizabeth Warren, would allow businesses to access to bank accounts and letting them list on U.S. stock exchanges.

"We believe that the timing of this deal was likely motivated by the re-introduction of the STATES Act, which both [Canopy] and [Constellation] had noted would be sufficient for Canopy to enter the U.S. market," Cowen analyst Vivien Azer wrote Thursday. "Acreage has the broadest geographic footprint among the major U.S. multi-state operators. The company is also among the best connected politically, with the Board of Directors including former Speaker of the House John Boehner."

"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," Azer added.