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Why Marcato Thinks the Canopy-Acreage Deal Is Bad for Acreage

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May. 7 2019, Updated 9:28 a.m. ET

Against the deal

In April, Canopy Growth (WEED)(CGC) announced that it would acquire Acreage Holdings (ACRGF), a US multi-state cannabis operator with cultivation, processing, and dispensing operations. However, on May 6, Marcato Capital Management, an investor that holds about 2.7% of Acreage, called this deal “value destructive” and believes that it is not in shareholders’ best interest for this deal to proceed.

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What’s the issue?

According to Marcato, Canopy Growth’s offer of $3.4 billion is significantly lower than what it believes Acreage is worth. Marcato believes that this value does not consider the strategic value that Acreage brings to the table. Marcato believes that Acreage’s leading position in the US deserves a premium over and above the $3.4 billion.

Marcato also stated that it believes the “enterprise values of cannabis companies will skyrocket upon the relaxation of current Federal restrictions.” Therefore, the current valuation of $3.4 billion does not account for the potential “unlocked growth and value embedded” in Acreage Holdings that Canopy Growth could yield after legalization at the Federal level.

Acreage Holdings was trading almost 5.6% lower after Marcato made this announcement, while Canopy Growth gained just about 0.5% during the day. Peers (HMMJ) including Aurora Cannabis (ACB) gained 1%, and Tilray (TLRY) declined by 0.86% around the same time.

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