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U.S. activist investor opposes Canopy Growth's bid for Acreage

A U.S. hedge fund says it will vote against Canopy Growth's proposed acquisition of Acreage Holdings, saying the $3.4-billion US offer is "substantially lower" than the U.S. cannabis company's worth.

Hedge fund says deal undervalues cannabis grower if pot becomes legal in U.S.

Packaging for a recreational cannabis product is shown at Canopy Growth Corporation's Tweed headquarters in Smiths Falls, Ont. Canopy Growth wants to get into the industry in the U.S., if and when it becomes legal. (Justin Tang/Canadian Press)

A U.S. hedge fund says it will vote against Canopy Growth's proposed acquisition of Acreage Holdings, saying the $3.4-billion US offer is "substantially lower" than the U.S. cannabis company's worth.

Marcato Capital Management, which manages funds that own roughly 2.7 per cent of Acreage's outstanding shares, says the deal is "unbelievably lopsided" in favour of the Canadian cannabis company.

The San Francisco-based activist investor adds in its letter to Acreage's board that its strategic value as one of the few multi-state operators in the U.S. merits a "significant premium."

Marcato says it also expects enterprise values of cannabis companies in the U.S. will skyrocket once it becomes legal under federal law, and prefers that Acreage remains independent.

Canopy announced last month that it had signed a deal to buy Acreage once there was a "federally permissible" way to do so.

Cannabis is legal for medical and recreational purposes in several U.S. states, but it remains illegal at the federal level in the U.S. and is considered a Schedule 1 drug.

Moving toward U.S. legalization

However, the political climate in the U.S. is becoming more receptive to cannabis. For example, the bipartisan states Act — which would amend the Controlled Substances Act and could effectively make cannabis federally legal in states where recreational consumption is legal — was reintroduced in Congress last month.

"Marcato believes it is highly imprudent for Acreage to sell itself today at the proposed valuation, with so much unlocked growth and value embedded in the company," the hedge fund said in its letter to the board.

Acreage owns licenses to operate or has management services agreements in place with licence holders in 20 states, including pending acquisitions.

Under the deal with Canopy, Acreage shareholders will receive an immediate payment of approximately $2.55 US per subordinate voting share or $300 million.

The companies said they will also execute a licensing agreement granting Acreage access to Canopy Growth's brands including Tweed and Tokyo Smoke, along with other intellectual property.

Once cannabis becomes federally legal in the U.S. and Canopy exercises its right, it proposed to pay an additional 0.5818 of a Canopy share for each Acreage subordinate voting share.

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