Despite a major buyout premium, Acreage Holdings (ACRGF) recently hit an all-time low. The deal appears to provide no security to shareholders and the recent firing of the founding CEO at Canopy Growth (CGC) has the ultimate value of the eventual buyout price up in the air. The question is why investors didn’t understand the risks in accepting the Canopy Growth shares before approving the merger.
Not Such A Great Premium
As with most deals, the devil was in the details. While Canopy Growth offered a deal value that offered a 40% premium for Acreage shareholders, the reality has never been this close.
Due to federal regulations, Canopy Growth had to work out a deal for a U.S. multi-state operator (MSO) that only involves a right to purchase the MSO in the future. For this reason, the deal came with inherent closing uncertainty.Acreage initially surged because a buyout from the Canadian cannabis market share leader promised to produce a global leader. Also, the $2.55 right to purchase option premium along with 0.5818 CGC common shares was very appealing before Canopy Growth collapsed.
Simple math suggests that shares of a stock trading over $50 would be found very appealing by Acreage. A total proposed deal value above $30 would naturally sound appealing to investors for a stock trading below $20.
Be Careful What You Ask For
The problem here is that investors have to be careful in what they asked for. The merger can’t finalize until cannabis is federally legal is the U.S. The merger could be on hold for years and possibly up till 90 months.
With the Canopy Growth BOD firing founding CEO Bruce Linton, the CGC currency is now in freefall having ended down nearly 8% on Friday to only $34. The market now has tons of questions regarding the future of a company that generated nearly C$100 million in an adjusted EBITDA loss in the last quarter.
The lesson for shareholders is to question the currency obtained in a merger. Acreage was the cheaper and better positioned stock, so investors traded a better valued currency for an extremely expensive stock. Marcato Capital Management even warned investors that Canopy Growth was trading at 178x ’20 EBTIDA estimates and Acreage was down at only 21x ’20 EBITDA estimates.
The end result is that Acreage is trading down to $12.75 and hit a new low of $11.75 on the day. Part of the weakness is that shareholders approved the merger triggering the option premium payment.
The stock is now trading based solely on the 0.5818 shares of CGC valuing Acreage at nearly $20 right now. Even another $9 dip by Canopy Growth to $25 would value Acreage shares above $14.
The key investor takeaway is that Acreage shareholders are likely having investor remorse for accepting the Canopy Growth deal that involves a right to purchase the U.S. MSO in the future. The stock now provides the best way to own the combination and a way to benefit from an ultimate decision to cancel the merger and place Acreage back on the market as an independent MSO.
For now, the stock is damaged goods due to the link with the problems at Canopy Growth.
Disclosure: No position.
To read more on the nitty gritty of what’s going on in the rising cannabis industry, click here.