In the 2018 Gallup poll, 62% of Americans favored marijuana legalization. It's very likely that % has increased since.
Among the young, swing voters (Libertarians, Independents, etc.) and various other social groups, the number who favor marijuana legalization is currently in the mid-70%'s and climbing sharply. Illinois just became the 11th state to legalize recreational adult use. Indeed, any US political candidate against marijuana legalization may find themselves unelectable.
Meanwhile, the latest estimates indicate the US cannabis market is likely to exceed $50 billion+. Globally, including hemp products and all cannabinoid uses, we've heard estimates as high as $150 billion.
The truth is no one really knows how big the market will be. Estimates could easily be off by orders of magnitude either way. Such key aspects as whether cannabis and products derived from cannabis will partially supplant beer and cigarettes, for instance, are still up in the air. Additionally, it is widely thought certain important drug categories worth tens to hundreds of billions - opioids, epileptic drugs, anti-inflammatories, sleep-agents, etc. - will be disrupted by cannabinoids, but the FDA isn't even reviewing such claims yet.
Nevertheless, there are many such as myself who think:
If these three things also describe your opinion, then I contend you should at least consider buying Acreage (OTCQX:ACRGF, ACRG-U). Yep, Darren McCammon, the guy who called Canopy "The Cisco Of Pot" and wrote "Canopy's Moat: Powered By ebbu," is now suggesting you buy another stock.
Well, sort of.
The basic Acreage-Canopy merger terms are:
However, I’ve heard all sorts of misinterpretations of this deal. Many stem from a mistaken belief the terms were set as a fixed dollar amount instead of the fixed share exchange it primarily is. Each ACRG-U share is worth .5818 CGC shares (+$2.55). So, as the price of CGC goes up or down, so too will the value of the deal for Acreage shareholders. Additionally, this .5818 share exchange doesn’t occur until it's legally permissible to do so (with a 7.5-year time limit). So, one doesn't really know when the deal will actually close.
Thus, there are uncertainties, and the market hates uncertainties. However, a long-term investor can also switch from CGC to ACRG-U and hope to capture not just the future returns of CGC but also a 40-50%+ spread on top of it.
As of this writing, the merger spread looked like this:
(Source: Author's calculations)
It’s one of the largest persistent merger spreads this analyst has ever experienced - one which continues weeks after the merger was announced, even though 91% of Acreage shareholders and 38% of non-insider shareholders have already confirmed they will vote for the deal. This large spread exists for both some valid and invalid reasons.
This deal is good for both Acreage and Canopy shareholders. It effectively combines the largest cannabis licensee in the US with the largest worldwide cannabis company to form an even more powerful juggernaut. Legally they remain two separate companies, effectively they will not be.
However, Acreage shareholders should also be aware of the downside. Canopy is very likely to move forward with or without them. Canopy has an established history and culture of breaking open the cannabis space, of leading the sector. In fact, Canopy's structure (co-CEOs) and management incentives are all keyed towards growth and expansion. Thus, if not Acreage, they will establish North American brands with Harvest Health & Recreation (OTCQX:HRVSF) or another MSO. What Acreage shareholders are really deciding here is not just whether they want to partner with the juggernaut of the industry but also, if they don't approve the deal, whether they want to risk ultimately being run over by it.
Indeed, ACRG-U shareholders should ask themselves what happens if the deal isn't approved.
Thus, although an ill-conceived letter from Marcato Capital made approval by ACRG-U shareholders seem more questionable, both groups are clearly better off if the merger is approved: ACRG-U shareholders because they want the $2.55 in cash, the access to Canopy IP and know-how, the ability to buy and sell shares in volume without affecting price, and the access to capital and resources to take the business to the next step. CGC shareholders because they want to expand brands into the US with as much head start against serious competitors like Altria (MO) / Cronos (CRON) as possible.
Indeed, I think it quite telling that the day after Marcato released its letter saying it would vote against the deal, ACRG-U traded down almost 6%, while CGC was actually up slightly. This was basically Mr. Market's way of saying ACRG-U shareholders need Canopy more than Canopy shareholders need Acreage. Though I am a shareholder in both, I have to agree.
No deal and CGC moves on to Harvest Health & Recreation or another MSO. No deal and ACRG-U likely sees tens of millions of insider shares sold into a relatively thinly traded share base, has the ongoing problem of trying to access the capital to build out its base in an illegal market, needs to spend further funds to develop its out products and brands or give up on that idea altogether, and ultimately has to compete against whomever Canopy does lend its heft and know-how to. Acreage shareholders should pay close attention, and consider that 6% drop may be a small precursor of what is likely to happen were this merger not to close.
The current high spread in the Acreage-Canopy merger exists in part due to do fear. Fear that shareholders may not approve the deal despite it being in their own best interests. Fear that cannabis won’t become legally permissible in the US within the next 7.5 years. These fears and misconceptions should dissipate with management further clarifying the deal, shareholders approving the merger in June, and ongoing progress on the legislative front.
Even assuming some of this is resolved, however, there will continue to be ongoing practical issues affecting the spread:
I personally chose not to do the classic long Acreage, short Canopy arbitrage. In part, I don’t want to pay the borrow fee on Canopy with the uncertain time frame for the deal to close. However, even more important to me is that I am unwilling to short Canopy, the leading company in a very high-growth sector. To me shorting Canopy, even as a hedge, is like shorting an internet firm in the mid-'90s. No thanks. Instead, I want to stay long only, in order to take advantage as this high-growth, worldwide paradigm shift continues with Canopy Growth at its lead.
To me, long cannabis and Canopy is what makes the most sense - the horse I have been on and want to continue to ride. It just so happens that currently the best way to ride CGC is probably to own Acreage shares. So, I sold some of my Canopy holdings and replaced them with ARCG-U shares.
If both shareholder groups approve the deal, the spread should shrink. It should further shrink as we get closer to the States Act passing. Ultimately, I plan to once again own CGC shares, only I will have gotten them at a 40-50%+ discount by taking advantage of the spread. After all, if one bought Acreage today at a 45% discount to the merger premium, the deal closed, and Canopy ultimately went on to double, the return for Acreage shareholders isn't 100%, it's over 350%! (=(($40.47*2)+$2.55)/$18)
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This article was written by
Darren's started his career as the Assistant Manager of a 7-Eleven; eight years later he was responsible for 14 stores. This imparted a business sense he still finds quite useful today.
After getting his MBA, Darren then started doing strategic financial planning and analysis for Silicon Valley firms eventually achieving Director's status. These strategy, modeling and analysis skills, as well as a lot of hours in boardrooms talking with executives, transferred well into stock investment. It allowed him to first retire in 2006 at the age of 40.
With Cash Flow Klub, Darren is now seeking to help others by sharing the analysis and real-world strategies that allowed him to retire early. He remains a full-time investor whose primary source of income is dividend and interest from his investments. He eats what he kills.
- Bachelors in Economics
- Masters in Business Administration
- Certificate in Personal Financial Planning
Disclosure: I am/we are long CGC, ACRGF. 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.
Additional disclosure: This article discusses speculative investments that are not federally legal in the United States, yet. I do not know your goals, risk tolerance, or particular situation; therefore, I cannot recommend any specific investment to you. Please do your own additional due diligence.