CanadaInvestment IdeasM&AStocksUSWhy Acreage-Canopy Growth Type Deals Might Be a Rarity in the Industry

David Jagielski David JagielskiMay 16, 20195 min

Canopy Growth Corp.‘s (NYSE: CGC)(TSX: WEED) deal with Acreage Holdings Inc. (CSE: ACRG.U) created a flurry of buying activity and Canopy’s stock soared to heights not seen since legalization took place last October. But the deal’s structure that depends on U.S. legalization didn’t seem to phase investors. Instead, speculation grew that other similar deals could be in place.

But other pot companies expressed doubts on contingent type deals with U.S. partners.

Do I want to commit major resources to that today? I’d rather go buy lottery tickets.

Aphria Inc. (NYSE: APHA) (TSX: APHA) Irwin Simon told Bloomberg

Those are some harsh words from one of Canopy’s key rivals. But the skepticism may be warranted considering it could take years for a deal to be finalized between Canopy and Acreage. The two have effectively locked themselves into the arrangement based on the hope for U.S. federal legalization.

Even one of Acreage’s largest investors isn’t convinced and is urging shareholders to vote against the deal. And other companies are skeptical. A big reason is it simply doesn’t add any capital today:

There’s no new capital associated with that and I think it puts a limit on what your upside might be.

– Hadley Ford, CEO of iAnthus Capital Holddings Inc. (CSE: IAN)

Why U.S. cannabis companies have big advantages today

While the temptation for Canadian cannabis companies to tap into the U.S. market is likely there, a TSX-based company has limited options. They could consider going to the Canadian Securities Exchange where many big U.S. companies, including Acreage, are listed. The U.S. cannabis industry is growing at a fast rate, and companies like Trulieve Cannabis Corp. (CSE: TRUL) and Cresco Labs Inc. (CSE: CL) are already starting to eclipse their Canadian counterparts.

Ten states have legalized marijuana for recreational use so far with potential for more revenue growth. Especially with populous New York and New Jersey showing an interest in legalizing. More cannabis companies may start popping up in those states while bigger players like Curaleaf Holdings Inc. (CSE:CURA) can use acquisitions to help extend their reach into those markets.

But companies like Aphria and Canopy may be limited in their options while waiting for federal legalization. The hemp-derived CBD market could open up some modest avenues for growth in the U.S., but won’t be as big of a slice as the partnership is banking on.

U.S. pot companies are quickly gaining an advantage over Canadian competition and most likely aren’t looking at the smaller market to the north. And Canadian companies are skeptical on deals waiting on U.S. legalization. From either side of the border, a contingent deal might prove to be too risky to take on.

 

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