Stone Fox Capital

About the Author Stone Fox Capital

Stone Fox Capital Advisors is a registered investment advisor founded in 2010. The firm offers portfolio management with a focus on opportunistic stocks providing secular growth trends at an affordable value. An emphasis is placed on fundamental analysis though charts are used for timing entry and exit points. Mark Holder graduated from the University of Tulsa with a double major in accounting & finance. Mark has his Series 65 and is also a CPA. Invest with Stone Fox Capital's model Net Payout Yields portfolio on IB Asset Management as he makes real time trades. The site allows followers to duplicate the model portfolio in their own brokerage accounts. You can find the portfolio and more details here: Follow Mark on twitter: @stonefoxcapital

Acreage Holdings: Too Eager to Approve Merger

Despite the disapproval of a large investment firm, Acreage Holdings (ACRGF) obtained very high shareholder approval for a highly questionable deal with Canopy Growth (CGC). The stock is actually down since announcing the deal back in April suggesting the market disagrees with shareholders.

Strong Approval

According to Acreage, an aggregate of 91% of eligible votes have voted for the deal with Canopy Growth. Oddly, insiders felt the pressure to agree to extend lockup agreements from shares sales in alignment with the completion of the arrangement with Canopy Growth and the subsequent acquisition of the outstanding Acreage shares.

Since going public last year, the stock has generally traded above $20 so insiders selling below $20 would’ve been absolutely absurd anyway. In addition, the merger would offer a substantially higher price, if it occurs. The only real meaningful lockup is one where Acreage management holds shares long after the uncertain deal closes.

Remember that the acquisition deal includes a $2.55 up-front cash premium to account for the uncertain timing of the right to purchase the shares of Acreage on federal approval of cannabis. Shareholders also get 0.5818 shares of Canopy Growth that a now valued at $24.78 per share based on Canopy Growth trading at $42.60. So naturally, insiders selling at these prices before collecting the potential 50% upside in the stock with a completed deal would be highly unacceptable to the market.

Shareholders Have To Wait

The biggest complaint by Marcato Capital Management LP was the transfer of relatively cheap U.S. cannabis focused shares for a rather large conglomerate that trades at a massive premium valuation to Acreage. Shareholders don’t appear to agree, but most investors probably intend to flip their shares for the initial deal premium.

Unfortunately for shareholders, the deal is going to take years to finalize. Influential Cowen cannabis analyst Vivien Azer predicted on CNBC that the States act wouldn’t get approval in the next year. The timing of federal legalization remains highly uncertain.

If one has to hold a cannabis stock the next 1-2 years, the clear best option is via unrestricted access to the potential gains of a multi-state operator (MSO) in the U.S. market. Acreage reported that Q1 revenues surged 487% to $12.9 million with pro-forma revenues soaring to $33.1 million.

Those numbers hardly matter to a company being bought by a stock with a combined market cap approaching $20 billion including the $3+ billion value of Acreage. The combined business is more tied to Canada and global growth than the rapid expansion in the largest U.S. market.


The key investor takeaway is that Marcato Capital appears correct predicting the acquisition structure doesn’t offer value to shareholders of the MSO. Regardless, the shareholders appear set to approve the right to purchase deal with an uncertain timing.

The best option for frustrated investors is to find another MSO hooked to the expected growth in the domestic cannabis market.  Those stocks are likely to get a bigger boost from federal approval of cannabis along with an uplisting of the stock to a major U.S. stock exchange, than Acreage Holdings tied into the much larger Canopy Growth.

To read more on the nitty gritty of what’s going on in the rising cannabis industry, click here.

Disclosure: No position.


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