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Canopy Growth to pay less for Acreage under new deal terms

Bubbles in a sample beverage over a Tweed logo seen during a tour at a Canopy Growth facility that produces cannabis derivatives in Smiths Falls, Ontario, Canada October 29, 2019. REUTERS/Blair Gable

Canopy Growth (WEED.TO)(CGC) and Acreage Holdings (ACRG-U.CN) have changed the terms of their deal, citing “volatile financial market conditions” and economic challenges.

The Canadian pot giant now intends to pay about US$843 million under current stock prices to acquire the American cannabis firm once sales are legal under U.S. federal law. That’s down from US$3.4 billion when the deal was announced in April 2019, the companies said in a joint statement on Thursday.

“All cannabis businesses have traded down. Clearly Acreage has traded down significantly, even in relation to Canopy,” chief executive officer David Klein told Yahoo Finance Canada in a phone interview on Thursday. “This represents a recognition that the differential has widened.”

Acreage shares have fallen nearly 60 per cent year-to-date. Toronto-listed Canopy stock is down almost 13 per cent over the same period.

Canopy’s blockbuster deal to acquire Acreage announced last spring was hailed as the first of its kind, charting the path for a major Canadian firm to enter the U.S. cannabis market. The deal hinges on U.S. federal lawmakers formally recognizing the rights of states that have legalized cannabis, which would allow companies listed on the Toronto Stock Exchange to directly own cannabis assets in the United States.

The new agreement proposes two classes of Acreage shares, including a new floating share not tied to a fixed exchange ratio, allowing Acreage shareholders to participate in the upside potential of a U.S. policy change that would greenlight the deal. Canopy’s chief executive officer David Klein told Yahoo Finance Canada that could happen as early as 2022.

Under the new terms announced on Thursday, Acreage shareholders and certain holders of convertible bonds will receive an upfront payment of US$37.5 million, or 30 cents per share, plus a sum based on a combination of fixed and floating shares totalling about US$800 million.

Canopy originally agreed to give Acreage shareholders 0.5818 of a Canopy share for each share of Acreage. Now, shareholders will receive 70 per cent of a fixed share and 30 per cent of a floating share for each Acreage share they hold.

Once the deal is consummated, Canopy would swap 0.3048 of a Canopy share for each fixed Acreage share, with the option to buy the floating shares for a price equal to their 30-day volume weighted average trading price, to a minimum of US$6.41 per share, payable in cash or shares at Canopy's discretion.

Klein said the changes create a “better alignment of interests” between Canopy and Acreage, noting Canopy is obliged to go through with the deal upon U.S. cannabis sales becoming federally legal.

“We wanted to make sure that Acreage was appropriately focused on driving top and bottom line performance,” he said. “I think the 70/30 share split that we now have reflects that. If the business really performs really well, those 30 per cent shares could be worth a lot. The flip side of that equation is then the 70 per cent need to be worth less.”

Shareholders will vote on the new terms at a meeting expected to take place in August.

The two companies acknowledge the new terms reflect a “challenging economic environment and increasingly tighter and volatile financial market conditions.”

“We continue to believe that it’s very important to have a partner that gives a fast start in the U.S. post-permissibility,” Klein said. “The clear advantage is having the existing retail licenses and having our brands and our IP in the U.S. prior to permissibility.”

Canopy has also agreed to loan Acreage’s hemp-focused subsidiary up to $100 million in two equal payments, $50 million upon completion of the new deal and $50 million tied to satisfaction of certain conditions. Canopy’s loan cannot be used for cannabis given that it is still federally illegal in the U.S.

The joint announcement was coupled with news that Kevin Murphy will resign as chief executive officer of Acreage, but will remain active as chairman of the board of the New York-based company. Bill Van Faasen, an Acreage board member, will fill the role on an interim basis.

Acreage has recently suffered a number of setbacks, including exiting the Iowa medical market. The multi-state cannabis operator has been selling off unprofitable assets, recently furloughed more than 100 employees, and is in the process of raising capital while agreeing to short-term loans on steep terms.

Jefferies analyst Owen Bennett said while the new terms are more favourable for Canopy, the changes highlight concerns about Acreage’s performance. He questioned if the deal struck prior to Klein’s leadership at Canopy would have moved forward under his supervision.

“We believe this is a reflection of the struggles facing Acreage at present and its ability to continue as a going concern,” Bennett wrote in a research note on Thursday. “We think this deal would not have happened under new management.”

Acreage shares climbed 22 per cent to $2.86 per share at 12:04 p.m. ET on Thursday. Toronto-listed Canopy shares were little-changed, down about one per cent.

Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.

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