Acreage-Canopy Deal: Will Acreage Holdings Stock See Major Gains?

Will Acreage Holdings Stock See Major Gains?
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Acreage Holdings Stock Prediction

As the years go on, we’re seeing more and more major deals take place in the legal marijuana industry. The latest one, between Canopy Growth Corp (NYSE:CGC) and Acreage Holdings Inc (OTCMKTS:ACRGF, CNSX:ACRG.U), already has many investors excited about what the deal means for legalization, as well as the future of Canopy Growth stock.

But what about Acreage Holdings stock? How will ACRGF stock fare following the deal?

In my mind, CGC stock will certainly be the bigger winner in the deal. In order to understand why, let’s peel apart the specifics.

Canopy Growth now has the option to purchase Acreage Holdings for $3.4 billion, with a mandate to exercise that right when cannabis production and sale becomes federally legal in the United States. (Source: “Canopy Growth Announces Plan To Acquire Leading U.S. Multi-State Cannabis Operator, Acreage Holdings,” Canopy Growth Corp, April 18, 2019.)

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Following the approval of shareholders from both companies and the Supreme Court of British Columbia, Canopy Growth will pay $300.0 million immediately.

“Our right to acquire Acreage secures our entrance strategy into the United States as soon as a federally-permissible pathway exists,” said Canopy Growth Chairperson and co-CEO Bruce Linton. (Source: Ibid.)

This deal makes a ton of sense—from the Canopy Growth side. The company now has a huge step up on its competition when it comes to entering the United States.

Whether that takes place next year or five years from now is anybody’s guess, but Canopy Growth has gained a significant foothold in the U.S. market with its option to acquire Acreage Holdings when pot becomes federally legal.

This is a very bright move on Canopy’s part. A win like this will increase the company’s promise in the eyes of many investors and it prevents Canopy Growth from making a reckless entry into a market that still has to sort out its marijuana laws.

The deal puts all the power in Canopy Growth’s hands. As for Acreage Holdings, there isn’t a whole lot that it can point to in the deal right now.

“When the right is exercised having access to Canopy Growth’s deep resources will enable us to innovate, develop and distribute quality cannabis brands across the U.S. and continue expanding our U.S. footprint,” said Acreage Holdings Chairman, CEO, and President Kevin Murphy.

“At the same time, a confluence of factors are making it much more difficult for a multi-state operator to achieve its full potential, including the enormous amount of cash required to scale,” continued Murphy. (Source: Ibid.)

Still, that money is still a long ways away. The promised billions of dollars are not going to be seen by Acreage Holdings until legalization (or until such time that Canopy Growth feels comfortable enough with the legal status of weed in the U.S. to enter the market).

In either case, the power is all in Canopy’s hands.

Furthermore, if legalization is delayed for a lengthy period, Acreage Holdings stock will continue to lose value in the eyes of investors as the deal it signed with Canopy Growth becomes less lucrative as the years go by.

Not to mention that, like Murphy mentioned, Acreage won’t be able to expand if the company can’t get its hands on the funds in the first place.

All in all, it’s not a bad deal for ACRGF stock; it’s just far better for CGC stock.

Analyst Take

It’s hard to look at the Acreage-Canopy deal and not see Canopy Growth as the real winner.

While Acreage Holdings will welcome the influx of cash (when/if it comes), the deal gives way too much leeway to Canopy Growth for my liking and puts ACRGF stock in a far riskier position than CGC stock.