Acreage Holdings Appears to Be Cashing out at the Wrong Time into the Wrong Stock

Not all investors are happy with the big attempt of Canopy Growth (CGC) to push into the U.S. cannabis market. In fact, one large shareholder wants the surprise move to purchase Acreage Holdings (ACRGF) via a right in the future blocked. Small investors might want to look at other U.S. cannabis multi-state operators (MSOs) due to the unknown risk surrounding the Acreage Holdings deal closing and specifically the timing of the deal.

Investment Manager Will Vote Against The Deal

Marcato Capital Management LP sent a letter to the board of directors of Acreage claiming the investment manger would vote against the deal. Marcato Capital only has 2.7% of the outstanding shares via owning 575,000 shares, but the investment management team carries a lot of clout on Wall Street.

For a recap, the Acreage deal involves a $2.55 per share upfront payment or $300 million to investors for waiting for federal approval of cannabis plus an agreement to receive 0.5818 shares of Canopy Growth once the deal closes. In total, the deal values one of the biggest MSOs in the U.S. at only $3.4 billion.

At the current stock price of $49, Acreage shareholders have a right to Canopy Growth stock worth $28.50 plus the $2.55 payment. The stock still trades right below $21 on the deal news so the market isn’t too confident that federal approval will allow the deal to close any time soon.

Lost Value

Marcato Capital thinks Acreage has a fair value far in excess of the deal value of $3.4 billion. The investment manager expects the enterprise values of cannabis companies will skyrocket upon the relaxation of Federal restrictions so selling out the company prior to that approval is irrational.

The investment manager estimated that Canopy Growth gained in value equivalent to $3.5 billion to suggest the deal was under priced by 50%. In addition, the deal via stock offers no value to Acreage shareholders.

Based on calculations from Marcato Capital, Canopy Growth trades at an EV of 178.2x consensus ’20 EBITDA estimates versus Acreage at 20.7x ’20 EBITDA estimates of $164 million. One really has to question why somebody would want to transfer stock from Acreage to Canopy Growth at some unknown future date.

The move is even more troubling considering the vast opportunities in the U.S. cannabis market that is estimated to reach $80 billion by 2030. The problem is that Canopy Growth now has a market valuation of nearly $17 billion while the CEO only expects revenues to top C$1 billion or ~$700 million in the next 12 months. Based on these differences in valuations encompassed in this graph from Green Thumb, the opportunity is logically in the U.S. MSOs and not the Canadian LPs.

Source: Green Thumb Industries presentation

Takeaway

The key investor takeaway is that Marcato Capital has a solid point that Acreage Holdings appears to be cashing out at the wrong time and into the wrong stock. The opportunity remains in the U.S. cannabis market with an MSO, not a Canadian LP with an inflated stock price and needing access to global markets to justify inflated valuations.