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Tepid Reaction in Canadian Weedstocks Following Big Canopy Growth Corp (TSE:WEED) Acquisition

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Although Canopy Growth Corp (TSE:WEED) (NYSE:CGC) (FRA:11L1) delivered an unexpected surprise to the market yesterday, Canadian weedstocks have reacted with a collective yawn. This may be somewhat surprising to investors—many of whom were expecting this cross border M&A to send shock waves throughout the market. We explore further.

To recap, Canopy Growth administered an official press release this morning that confirmed yesterday evening’s hysteria. The company announced that they have entered into a definitive arrangement agreement that grants them the right to acquire 100% share ownership in Acreage Holdings Inc., at such time as cannabis production and sale becomes federally legal in the United States. All told, the transaction is valued at approximately US$3.4 billion on a fully-diluted basis—in both cash and stock—on a 0.5818 CGC – ACRG exchange ratio basis. 

Both companies will also execute a licensing agreement granting Acreage access to Canopy Growth’s brands such as Tweed and Tokyo Smoke, along with other intellectual property. Once the all rights are exercised, Acreage will become part of the world’s biggest and most expansive cannabis company. Until then, the two companies will continue to operate independently.

Given that M&A is traditionally one of surefire ways to spark animal spirits, why is the Canadian side of the market not responding? Perhaps the answer lies in timing.

As we’ve witnessed lately, Canadian weedstocks have been mostly weak outside of a few pockets of strength—cannabis oil stocks specifically. Remember, the weakness in HMMJ is occurring despite an historic melt-up rally in broad market indexes that are attaining new all-time high. This shouldn’t occur in a strong market.

Disappointing earning report follow-through in Cronos Group, Tilray, CannTrust Holdings and Aphria has put a damper on near-term earnings expectations. Despite Canopy Growth blazing M&A trails, leading to today’s strong response ($61.78, $4.67, ↑8.18%), somehow it seems all too far away. The market sports a decidedly “show-me” attitude right now.

As well, Canopy Growth’s announcement is completely contingent on U.S. lawmakers allowing cannabis production and sale becomes federally legal in the United States. Until that happens, the M&A taking place is only 1/2 complete. That doesn’t mitigate the importance of today’s announcement, but it does minimize its potential impact on price action in the marketplace right now. The importance of SAFE Banking Act/STATES Act (the first in progress; the second upcoming) legislation passing on Capitol Hill and signed into law have taken on a whole new meaning.

For its part, U.S, multi-state operators (MSOs) have fared much better today. The U.S. Marijuana Index is currently ↑2.56%—around 2.5x its Canadian benchmark counterpart (HMMJ)—although early euphoria has faded somewhat. Several leading MSOs touched high-single-digit and double-digit percentage gains, and have kept the majority of them. Ultimately, MSOs will be the biggest near-term beneficiaries of upcoming cross border M&A, even if much of the premium is tethered to Canadian acquirers stock prices. Once Canadian weedstocks prices turn around, both markets will benefit.

Midas Letter congratulates Canopy Growth for leading yet another forward-looking and market-changing initiative, at a time when collective market performance is rather skittish on the Canadian side. Just like in mid-August 2018, Canopy Growth has changed the narrative and given investors something to look forward to. We wouldn’t expect anything less from King Canopy.

Midas Letter will have additional coverage as events warrant.

Original article: Tepid Reaction in Canadian Weedstocks Following Big Canopy Growth Corp (TSE:WEED) Acquisition

©2019 Midas Letter. All Rights Reserved.

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