Marcato To Vote Against Acreage Holdings' Value-Destroying Proposed Transaction With Canopy Growth Corporation
06 May, 2019, 09:00 ET
SAN FRANCISCO, May 6, 2019 /PRNewswire/ -- Marcato Capital Management LP ("Marcato"), a San Francisco-based investment manager which manages funds that beneficially own approximately 2.7% of the outstanding Subordinated Voting Shares* of Acreage Holdings, Inc. (ACRG-U.CN) (ACRGF) (FSE:0ZV) ("Acreage" or the "Company"), today announced it will vote against Acreage's value-destroying proposed transaction with Canopy Growth Corporation (TSX:WEED.TO).
Marcato also sent a letter to Acreage's Board of Directors, which can be found below.
May 6, 2019
Dear Board of Directors:
Marcato Capital Management ("Marcato"), the beneficial owner of 575,000 shares, or approximately 2.7% of the outstanding Subordinated Voting Shares of Acreage Holdings, Inc. ("Acreage" or the "Company"), has significant capital markets experience and a long track record of working collaboratively with boards of directors to uncover strategies to enhance value.
As a large Acreage shareholder, we will be voting against the proposed transaction with Canopy Growth Corporation ("Canopy") as we believe this is a value destructive transaction and not in the best interests of shareholders.
Let us explain.
The headline transaction value of $3.4 billion is substantially lower than the fair value of Acreage based solely on the present value of Acreage's future cash flows.1
We believe Acreage's strategic value, as one of the few multi-state operators of scale in the U.S., with leading positions in the most valuable markets merits a significant premium to any stand-alone cash-flow derived valuation. Furthermore, we believe enterprise values of cannabis companies will skyrocket upon the relaxation of current Federal restrictions. Accordingly, Marcato believes it is highly imprudent for Acreage to sell itself today at the proposed valuation, with so much unlocked growth and value embedded in the Company.
One need only look at the performance of Acreage and Canopy shares since the deal was announced to see that the market agrees with our analysis:
- Shares of Acreage are 6.0% lower than where they closed the day prior to the announcement, while shares of Canopy are 15.2% higher over the same period.
- In total, Canopy's market capitalization has increased by roughly US $3.5 billion2 since the deal announcement, indicating pro forma economic value to Canopy of US $6.9 billion -- over 100% greater than the price offered to Acreage shareholders.
Shareholders of both companies appear to share Marcato's view that this is a great deal for Canopy and a terrible deal for Acreage.
The relative value is unbelievably lopsided in Canopy's favor. Canopy stock for Acreage stock is simply a bad deal for Acreage shareholders.
Canopy's closing price on the day before the deal was announced represents an EV/EBITDA multiple of 178.2x consensus calendar 2020 EBITDA. This compares to the Acreage deal value of US $3.4 billion, only 20.7x consensus 2020 EBITDA of $164 million.3 Acreage shareholders are being asked to exchange an attractively valued security for a highly speculative one. Worse, Acreage shareholders have no ability to predict when, or if, the actual share exchange will occur and must finance an incredibly high borrowing cost to hedge their Canopy exposure if they want to maintain their stake through any potential closing period. Acreage shareholders must account for these time and cost uncertainties by discounting the value of Acreage shares today. This is exactly why Acreage shares currently trade at $22.03 when the cash and equity offered by Canopy equates to $31.10, or 41% higher than current share price levels.4
The structure and consideration offered in this proposed transaction simply does not create value for Acreage shareholders.
The Acreage sale process was not designed to maximize shareholder value.
It is our understanding that no other third-parties were given an opportunity to make an offer for the Company prior to executing this transaction with Canopy. Given the agreement's contingency on legalization, we would expect that a large universe of potential bidders would have the interest and ability to enter into such a deal. Potential strategic partners include not just other cannabis industry participants, but all major spirits, beer, beverage, tobacco, and CPG companies. We question whether the Acreage Board has fulfilled its fiduciary duty to shareholders by failing to explore all other value-maximizing options before entering into an agreement that did not include at a minimum an industry standard "Go-Shop" provision.
Canaccord recently initiated sell-side coverage on the stock at $35/share…yet Acreage's Board received a fairness opinion from Canaccord at $27.48. Huh?
Consider that sell-side analyst stock price targets range from US $31-$42, all significantly higher than the $27.48 implied by the deal on the day of announcement. In particular, it is curious that the Acreage Board received a fairness opinion from Canaccord in support of this deal when Canaccord's own research analyst published a $35 price target only four months prior in his extensive initiation report.
For all of these reasons and more, Marcato will be voting NO on the proposed deal. But then what?
If, and when, shareholders reject the terms of this ill-conceived, value-destructive transaction, we would prefer one of two paths:
1) Remain independent. Our preferred path would see the Company remain independent, continue to execute on its strategic plan, and be patient when considering strategic transactions until there is greater visibility on the overall U.S. legal and regulatory landscape.
2) Run a formal and competitive sale process. If the Acreage Board insists on pursuing a sale or combination with a strategic partner, then hold a proper auction run by a reputable investment bank. Invite Canopy to participate along with every other major spirits, beer, beverage, tobacco, cannabis, and consumer company, etc., and sell the Company to the party that offers the highest consideration in the form of cash and/or valuable risk-adjusted currency.
We are of course available to discuss our views with the Board at your convenience.
\S\ Mick McGuire
* Subordinate Voting Shares outstanding as of 12/31/18 (21,471,042), Acreage Holdings, Inc. Form 40-F, 4/30/19
1 Canaccord Genuity, Acreage Holdings, Inc. Initiation of Coverage 12/17/18, "Developing a leading national footprint"
2 F/D Acreage shares of 117 million x exchange ratio of 0.5818 and stated pro forma ownership of 12.1%, implies pro forma F/D Canopy shares of 561 million
3 Consensus estimates per CapitalIQ
4 Closing prices as of 5/3/19
Jonathan Gasthalter/Nathaniel Garnick
Gasthalter & Co.
SOURCE Marcato Capital Management LP
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