Complex deal revised as cannabis company valuations are down across the board, says lawyer
Amid a turbulent downswing in the cannabis market, Canopy Growth Corp. and Acreage Holdings Inc. have modified their 2019 plan of arrangement.
In April of 2019, as part of the company’s planned expansion into the U.S. market, Canopy bought the right to purchase all Acreage’s shares once cannabis is legalized federally in the United States. Canopy is based out of Smiths Falls, Ont. and Acreage hails from New York City.
Since the deal was inked, there has been a “significant depreciation” in cannabis company value “across the board,” says Jonathan Sherman, partner in the securities group and co-chair of the cannabis group at Cassels Brock & Blackwell LLP. The capital requirements in the industry remain high and with those challenges has come a surge in restructuring proceedings, he adds.
“Obviously there's been a lot of change in market dynamics over the course of the last 12 months in the cannabis sector. And so, for a variety of reasons, parties reopened the commercial negotiation and to look at something that was new and different,” says Sherman, who, along with a deal team from Cassels, acted for Canopy.
“There's been a significant decline in the value of both companies — but also consistent with general market factors and it's not as if Canopy or Acreage are outliers in that sense,” Sherman says.
The initial agreement was worth US$3.4 billion and planned for two stages. For phase one of the deal, Acreage shareholders got US$300 million, or around US$2.55 per share. For phase two, when cannabis becomes legal in the U.S., Acreage subordinate-voting shareholders would receive .5818 of a common Canopy share for each Acreage subordinate-voting share held.
On the initial deal, having the call built into the share terms was a “novel concept” which Sherman says was required to provide for the seven-and-a-half year interim period, while both parties wait on legalization.
The new deal will include a US$37.5 million up front payment and Acreage shares are being split into two classes, which will trade separately. Each Acreage shareholder will receive .7 of a fixed Canopy share and .3 of a floating Canopy share for every Acreage share held. The fixed shares will be subject to the same terms as the original deal, with the mandatory requirement for Canopy to acquire the shares upon U.S. federal cannabis legalization, and the floating shares will have a call right and no mandatory purchase obligation from Canopy. The floating shares will be subject to fair market value, relative to the Canopy shares at the time of legalization, but with a minimum price of $6.41 per share.
The time between the implementation of the new agreement and the termination of Canopy’s right to buy the Acreage shares has also been extended from seven-and-a-half years to ten years.
Upon closing, Acreage shareholders will swap their fixed Acreage shares and get .3048 of a fixed Canopy share for every one Acreage share held — a 120 per cent premium on the June 24, 2020 closing price for existing shares on the Canadian Securities Exchange.
While the initial deal contained was novel and complex arrangement, the revised deal’s dual class structure is “very unique and complex,” says Sherman.
“The paperwork for the initial deal was exceptionally complex for an M&A. And it looks a little bit like an M&A and a joint venture at the same time, because … there's this long interim period,” he says. “In terms of the governance during the interim period, there's a lot of thought that goes into what exactly are the guardrails for how the target can continue to operate the business to make sure that Canopy knows what it's getting at the end of the day.”
“While Canopy can't exert any form of control because of the U.S. federal regulatory framework. There's a set of guardrails that acreage is required to operate in accordance with and that's probably the most unique element of the transaction — just trying to really think about what does the next 10 years potentially look like and how you protect both parties interests during the interim period.”
As part of the new agreement, Canopy will lend Acreage subsidiary Acreage Hempco US$100 million. A Canopy statement said the loan will provide capital for hemp operations and allow Acreage to participate in the growing Cannabidiol market. The amendments to the deal will need to be approved by Acreage shareholders, the British Columbia Supreme Court and the CSE.
Canopy produces cannabis for the medical and recreational market through the subsidiaries Tweed Inc, Bedrocan Canada Inc, Tweed Farms inc and Mettrum Health Corp. Acreage is a vertically integrated, multi-state owner of cannabis licenses and manufactures medical cannabis.