Canopy Growth Could Be on the Cusp of Making a Huge Bet on U.S. Marijuana Legalization

You might call it "Coming to America Part II."

Bloomberg and CNBC reported Wednesday that top Canadian marijuana producer Canopy Growth (NYSE: CGC) is in talks to acquire U.S.-based cannabis operator Acreage Holdings (NASDAQOTH: ACRGF). Both news organizations stated that sources "familiar with the matter" think Canopy is close to making a deal to buy Acreage. As of the market close on Wednesday, Acreage Holdings' market cap stood at nearly $2.5 billion.

Canopy Growth announced in January that it plans to invest between $100 million and $150 million to build a large-scale hemp production facility in New York state. But the possibility that the company could soon acquire Acreage Holdings means Canopy could be on the cusp of making a huge bet on U.S. marijuana legalization.

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What Canopy would get

It's not surprising that Canopy Growth might be interested in Acreage Holdings. The company ranks as the largest vertically integrated, multi-state owner of cannabis licenses and assets in the U.S. based on the number of states in which it holds licenses.

That total number of states currently stands at 19 including Acreage's pending acquisitions. And those states include several of the biggest cannabis markets in the U.S. Arcview Market Research estimates that the total addressable market in the states where Acreage owns licenses will grow to $14 billion by 2022.

Acreage announced the addition of an important asset in December with the acquisition of Form Factor, a multi-state manufacturer and distributor of cannabis-based edibles and beverages. Acreage CEO Kevin Murphy said at the time that the deal put his company "on a direct path to become the Procter & Gamble of cannabis." 

If Canopy Growth does buy Acreage Holdings, it would also gain some impressive political connections. Former U.S. House Speaker John Boehner and former Canadian Prime Minister Brian Mulroney serve on Acreage's board of directors. 

Why it's a big bet on marijuana legalization

There's one major wrinkle with a potential acquisition of Acreage Holdings by Canopy Growth. As long as marijuana remains illegal at the federal level in the U.S., Canopy can't operate in the U.S. marijuana market and retain its listings on the New York Stock Exchange (NYSE) and the Toronto Stock Exchange (TSX).

This wasn't a problem with Canopy Growth's move to construct a hemp production facility in New York. The passage of the 2018 Farm Bill in December legalized hemp (which, like marijuana, comes from the cannabis plant but, unlike marijuana, contains low levels of psychoactive chemical THC).

However, should Canopy Growth buy Acreage Holdings and actively run the company, it would be in violation of the NYSE and TSX listing requirements. So how can Canopy acquire Acreage? One scenario is that the company could purchase Acreage in a way where its ownership doesn't become active until the U.S. legalizes marijuana at the federal level.

Taking this approach probably wouldn't make a lot of sense if changes to U.S. marijuana laws weren't a likelihood in the not-too-distant future. But bipartisan legislation is making its way through the U.S. Congress to revise federal marijuana laws. There's a real chance that legalization of marijuana in the U.S. could be on the way relatively soon. A multibillion-dollar acquisition of Acreage by Canopy would be a big roll of the dice that this could happen.