At a cannabis event in downtown Los Angeles last Friday, the recurring water cooler conversation was Canopy Growth’s recent acquisition of Acreage Holdings, one of the largest and most significant deals in the nascent industry to-date.
Financiers, cannabis industry hopefuls, and attorneys representing firms with an international reach gathered for an investor conference hosted by the Cannabis Society, during which the nuances of conflicting state and federal laws in the US were also discussed.
The transaction, in which Canopy sort of pre-acquired Acreage, was carried out through a “plan of arrangement,” a court-approved process for a foreign merger that has become popular in Canada, Joshua Masur, a partner at Zuber Lawler, noted during a conversation with Alexander Lalka, a partner at Miller Thompson. The deal, Lalka added, will consist of two steps. First, Canopy will give $300 million to Acreage shareholders (“about $2.6 dollars per share”). Then, once Canopy can legally operate in the United States, it will “actually acquire Acreage and the balance of the purchase price will be paid.” The purchase price? $3.4 billion dollars, “ a very significant transaction,” Lalka said.
Heather Molloy, Executive VP at TerrAscend, then weighed in, recalling the first time she heard about the transaction. “I thought, alright, Acreage is done.” However, given that the company “can continue issuing Acreage shares, and then those shares can convert into Canopy shares at a fixed ratio,” she now believes Acreage is actually just getting started.
Earlier in the event, a keynote by Richard Carleton, CEO of the Canadian Securities Exchange, also touched on the Acreage-Canopy deal. Unlike that transaction, said Carleton, “a lot of the deals are fairly small.” However, he underscored, they are closing at a rate of four per day.
The Acreage-Canopy transaction, TerrAscend’s Molloy added, is “an acknowledgement that there’s this wall of capital that’s sitting in Canada, trying to come into the US.” It’s also, she said, “a sign of life that more and more capital is going to continue to flow into the US and [that] people are really looking for creative ways to invest.”
When asked by Zuber Lawler’s Masur about structures being used to facilitate cross-border investment, Lalka predicted that deals that don’t become fully effective until legalization takes place in the United States “will probably become standard,” as investors look for ways to get an early foothold in the market.
This comment aligned itself with an earlier observation made by Zuber Lawler’s Managing Partner, Tom Zuber. During his keynote, he referred to this aspect of prohibition as a “gift.” If it were not for fear of federal intervention, he said, “many of us wouldn’t be in this room. Prohibition has allowed smaller companies to become larger companies.”
Nevertheless, most of the conference’s presenters are looking forward to the United States opening up. Carleton, CEO of the Canadian Securities Exchange, noted that, following the approval of Proposition 64 in California, which legalized adult use, his company “had an incredible explosion of interest in the sector—not just from Canadian investors, but from investors around the world.”
Lalka of Miller Thomson brought up another point: the status of cannabis in the United States, he said, has generated serious travel complications for clients involved in the cannabis industry. It’s “a very sensitive issue I deal with it almost on a daily basis,” he said, noting that one individual has been banned for life. For this reason, he added, “we have immigration firms that we talk to in the U.S. that are on call, in case anything like that happens.”
When Zuber Lawler’s Masur asked his colleagues for insights into what the U.S. cannabis market might look like post-federal legalization, TerrAscend’s Molloy said she believes regulations will remain “really state-specific,” especially given that some states have taken more risks to legalize first.
“I don’t think that these states are going to forego their revenue,” she added. “They’ve fought so hard and taken so much risk and have built up their own infrastructure and collected a tax base—I don’t foresee the states rolling over.”
The conference also placed a premium on intellectual property. During his address, Tom Zuber, who also has a degree in biomedical engineering, categorized licenses and real estate in the cannabis industry as depreciating assets. He encouraged his audience to look to the future. “In terms of technology,” he said, “what we’re going to discover as we look backwards to today is that our understanding of the technology of the plant is nascent. We are toddlers just getting out of the crib.”
“We don’t know what’s going on in that plant,” Zuber continued, “and we don’t yet understand what’s going on between the plant and human physiology.”
“I think it’s likely —in fact, I’m certain— that five years from now we’re going to look back at the products that are isolates, a CBD isolate, and say, ‘Wow, that’s that’s cute. That’s archaic,’” he said.
Pointing to the burgeoning medical cannabis industry in Europe, Zuber underscored that an emphasis on developing and guarding intellectual property will enable investors to influence the industry.
In Germany, he said, as an example, “you can’t market directly to consumers. However, you can market to doctors in relation to THC, and you can educate these doctors who currently don’t understand the plant.”
“That’s an opportunity because you get to educate them,” Zuber continued. “The companies that you invest in get to educate them. And in the context of that education, there is value. In knowing the doctors and having them be comfortable with you as a source of information related to cannabis, you get to introduce brands.”