Weekly Cannabis Report: Canopy Taking Advantage Of Acreage

|
Includes: ACB, ACRGF, APHA, BMMJ, CRLBF, CRON, CTST, CURLF, CWBHF, EMHTF, GGBXF, HEXO, HMLSF, HRVSF, IIPR, KHRNF, KSHB, MJ, NACNF, NEPT, NXTTF, OGRMF, TGODF, TLRY, VFF, VGWCF
by: Cornerstone Investments
Summary

The cannabis sector continues its correction as major ETFs all dropped ~3% last week amid weakness in the Canadian sector.

Canopy announced a deal to acquire Acreage contingent on U.S. federal legalization but the premium is only 10% above Acreage's RTO price.

Other U.S. MSOs went up last week as investors bet more deals could follow; we think only Cronos and Tilray could do a similar deal.

Cannabis, Marijuana, Hemp, Cornerstone Investments Welcome to our Weekly Cannabis Report, a reliable source for investors to receive the latest developments and analysis in the cannabis sector.

Trading Summary

Cannabis stocks continued to struggle last week. Horizons Marijuana Life Sciences Index ETF (OTC:HMLSF) dropped 3.1% and ETFMG Alternative Harvest ETF (MJ) lowered by 3.4%. Horizons released a new ETF called U.S. Marijuana Index ETF which has all major U.S. players.

(Source: Bloomberg)

Canadian Large-Cap: Aphria (APHA) was the big mover last week after its stock tanked 24% due to disappointing quarterly results. Canopy led the group with its 5.4% gain after it announced a deal to acquire Acreage Holdings. Aurora (ACB) was up 1.4% after Bank of America initiated coverage with a buy rating. Tilray (TLRY) and Cronos (CRON) continued their recent slides as investors struggle with their elevated valuations.

Canadian Mid-Cap: The mid-cap space was mixed. HEXO (HEXO) gained 7.4% after Bank of America initiated coverage and called it a Top Pick. OrganiGram (OTCQX:OGRMF) dropped 6.7% despite announcing a strong quarter. CannTrust (CTST) slid 1.3% as the stock struggles to recover from a deeply disappointing poor Q4 results. Green Organic Dutchman (OTCQX:TGODF) lost 6.9% without news.

Canadian Small-Cap: Village Farms (VFF) dropped 9.9% after Citron released a short attack on the company. Emerald (OTCQX:EMHTF) also dropped 13.3% as Citron mentioned it in its short report. Namaste (OTCQB:NXTTF) lost 17% last week as the company continues to suffer from a lack of strategic direction after its CEO was fired. National Access Cannabis (OTCPK:NACNF) dropped 13.2% after announcing its quarterly result. Extraction players had a strong week as Valens Groworks (OTCQB:VGWCF) and Neptune (NEPT) both advanced >10%.

(Source: Author, based on public data)

U.S. Cannabis Operators: The U.S. MSOs had a strong week boosted by Canopy's entry into the U.S. market. Canopy agreed to buy Acreage (otcqb:ACRGF) contingent on U.S. federal legalization. Cresco Labs (OTCQX:CRLBF) gained 6.2% and Harvest Health (OTCQX:HRVSF) gained 6.0% as investors expect more deals to follow. Curaleaf (otcqx:CURLF) led the group by soaring 18% while recovering much of the recent losses.

Green Growth (otcqb:GGBXF) rose 14.5% after it terminated its hostile bid for Aphria and bought back 27 million shares from the billionaire Schottenstein family. Body and Mind (otcpk:BMMJ) continued to soar with a 13.8% gain and the stock has rallied close to 200% in a span of one month.

Ancillary and International: Charlotte's Web (OTCQX:CWBHF) gained 4.5% without news. Latin American player Khiron Life Sciences (OTCQB:KHRNF) was flat while stabilizing its recent slide. KushCo (OTCQB:KSHB) dropped 4.1% in the aftermath of a mixed quarter. Innovative Industrial Properties REIT (IIPR) dropped 4.7% but remains 78% up for the year.

(Source: Author, based on public data)

Industry News

Looking Ahead

Last week was dominated by chatters around Canopy's deal to acquire Acreage which is contingent on the U.S. legalization. The deal was the first time a Canadian cannabis company acquired a major U.S. multi-state operator. The transaction was structured as an innovative solution that provides a fixed purchase price for Canopy to acquire 100% of Acreage within the next 7.5 years as soon as the U.S. legalizes cannabis federally.

However, the deal looks like a very one-sided outcome to us. We think Canopy took advantage of the situation and negotiated a great deal whereby it secured access to an established platform at a price that looks very attractive. Canopy's offer comprised of $2.55 in cash and 0.5818 Canopy shares per Acreage share which were worth $27.45 at the end of Thursday. Considering that Acreage raised at $25 per share during its RTO in November last year, less than six months ago, we think the price is highly attractive to Canopy. On the other side, Acreage's public shareholders are clearly frustrated with the lack of premium and Acreage shares closed at $22.51 last week, a discount of 18% to the headline offer price. The discount makes sense given the uncertain timeline of the deal and an offer price that has a small cash component and depends on Canopy's share price at the time of closing.

For investors, we think expectations are running high that other deals could follow for other U.S. MSOs. However, we think there are very few players that could do what Canopy did here. Canopy paid $300 million of cash to secure the Acreage deal and only Cronos and Tilray currently have similar amounts of cash. Besides these two players, most other Canadian players would struggle to acquire any of the top U.S. MSOs. Many of these American cannabis companies have gotten bigger than their Canadian peers. As a result, we think investors should not get too excited about other similar deals, especially after Acreage sold itself for a small premium.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.