David George-Cosh

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Canopy Growth Corp. announced Thursday it is significantly repricing its deal to acquire U.S. cannabis operator Acreage Holdings Inc. given "challenging" economic conditions, when it becomes federally permissible to do so. 

Canopy will now pay about US$843 million under current stock prices to acquire Acreage, down from an original purchase price of US$3.4 billion, the company said in a statement. 

However, that figure is likely to be different once the deal is triggered as it includes a complex calculation of two stock ratios used to determine the final price for Acreage shares. 

"This keeps Acreage as Canopy's main point of entry into the what will be the largest cannabis market upon federal permissability," said David Klein, chief executive officer of Canopy Growth, in a phone interview with BNN Bloomberg.

He said he expects the U.S. to legalize cannabis at the federal level as early as 2022. 

The new terms of the deal come amid an acknowledgement from both Canopy and Acreage that the industry faced "challenging economic environment and increasingly tighter and volatile financial market conditions, particularly for cannabis companies."

Klein said that Canopy wasn't able to walk away from the previous arrangement with Acreage due to terms associated with the deal, but the restructuring also helps to incentivize the U.S. company's management to operate a more efficient business. 

"The original transaction has frequently been referred to as a call option, but Canopy is required to close on the transaction upon federal permissibility. There isn't really a scenario where the closing wouldn't happen," he said. 

Klein added that the new deal will also include a way for Acreage to license Canopy's so-called "Cannabis 2.0" products, such as infused beverages and vapes for the U.S. market. Canopy recently launched an initial roundup of beverages that now represent about for 12 per cent of its total sales. 

"With this revised deal and some of the changes they're making in management, we're going to find a way to get to a position where those 2.0 products can come to the U.S.," Klein said.  

As part of the new deal, Canopy will pay Acreage an up-front cash payment of US$37.5 million as well as a calculation on the final price using a combination of fixed and floating shares that once added up, come to US$843 million. 

Once Canopy exercises its right to proceed with the takeover, the companies will use a ratio of 0.3048 for each Canopy share when determining the value of fixed shares, which were given a weighting of 70 per cent. The remaining 30 per cent is calculated using a value of $6.41 per Acreage share, although that could increase if the company's stock increases prior to Canopy opting to trigger the deal. 

Previously, Acreage shareholders were to receive 0.5818 of a Canopy share for each share held. 

In addition to the deal's repricing, Acreage said Thursday that Kevin Murphy, the company's CEO, will step down immediately but will remain chairman. Bill Van Faasen, who sits on Acreage's board and is a former health care executive, will take on the role of interim CEO at the company until a permanent replacement is found.

Canopy will also provide Acreage with a loan of up to US$100 million to help the U.S. company expand its hemp operations. It cannot be used for cannabis given that it is still federally illegal in the U.S.

Jefferies LLC analyst Owen Bennett said in a report Thursday that the deal's repricing isn't unexpected given Acreage's recent financing challenges. Earlier this month, Acreage announced it entered a financing agreement with an unnamed institutional investor for US$15 million that came with a 60 per cent interest rate. 

"Given the severe difficulties at Acreage, and how Canopy would have been exposed to these, this move, while lowering expected dilution, are positives that can be taken from this update," Bennett said.