Cannabis sector gets high on mergers

The cannabis sector's urge to merge shows no sign of abating. Canada's Canopy Growth Corp., headed by Bruce Linton (pictured), has agreed to buy Acreage Holdings, one of the biggest US marijuana growers, in a $3.4bn deal, notes Kimberly Chin in The Wall Street Journal.

But the tie-up comes with a twist: it depends on cannabis production and sales being legalised by the US federal government. Canopy will pay $300m upfront in cash, with the rest in shares once legalisation occurs. If it doesn't arrive within the next 90 months the deal will automatically be called off. This "non-takeover takeover" is a "smart workaround" for Canopy's shareholders, since it's risking just 2% of its $15bn market capitalisation, says John Foley on Breakingviews.

However, even though Acreage's shareholders receive a 42% premium, the deal "makes less sense" for them because they are "giving up the chance to negotiate a greater premium on a higher share price later". After all, "were cannabis to become federally legal, an established producer might have its pick of suitors".

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It also means that "Acreage shareholders are effectively taking a bet on Canopy's growth". One hint of what could be in store for the sector when legalisation does take place comes from shares in hemp firms, says Connor Smith in Barron's. Late last year Congress legalised hemp, "opening the floodgates for companies to sell "creams and sprays... said to have a calming effect". With major drugstores such as Walgreens already "on board the hemp hype train", shares in related firms have shot up.