The Canopy/Acreage Deal Puts Canadian Cannabis Back on the Map

Canopy Growth Corp.’s (TSX:WEED)(NYSE:CGC) deal to buy Acreage Holdings just sent a signal to U.S. investors that Canadian Cannabis companies are the real deal. Here’s why.

| More on:

“We’re very bullish on the globe, on the U.S. — not so much on Canada,” stated CB1 Capital partner Loren DeFalco recently.

DeFalco wasn’t talking about the Canadian cannabis companies themselves but rather the cannabis marketplace in this country where companies like Canopy Growth (TSX:WEED)(NYSE:CGC) face severe advertising restrictions and regulatory choke holds that keep retail distribution from really thriving.

Sure, Canadian cannabis leaves a lot to be desired right now, but five years from now companies like Canopy will make sure it’s a different story.

Canada’s smaller market

And it’s hard to ignore the fact that California’s pot market is bigger than all of Canada, a reality that’s haunted Canadian companies for more than a century. The U.S. market, even in its current half-in, half-out state of legality, is still far more attractive in terms of population.  

Currently, there are 10 states where recreational pot is legal including California. The population of those states adds up to almost 80 million people, or more than double Canada’s population. Of course, the U.S. market is more attractive.

However, that doesn’t mean investors should avoid cannabis companies based in Canada simply because their home market is a little dysfunctional at the moment.

Canada’s cannabis marketplace will grow over time to be an attractive middle-market opportunity. The black market here in Canada accounts for 81% of the demand for cannabis. By 2020, it’s expected to drop to 59% by the end of 2020.

It won’t be nearly as big as the U.S. and several countries in Europe, but it will hold its own.

Plenty of expertise

What Canada might lack in market size, it more than makes up for it in terms of industry experience. There are a lot of smart people working in facilities from coast-to-coast to produce some of the best pot in the world. You can’t put a dollar value on this intangible.

The global market might be a big one, but the head start Canada’s gained from being the second country in the world to legalize cannabis will remain an advantage as long as Canadian companies continue to take risks, innovate, and reach well beyond its borders.

The Acreage deal

Canopy’s recent agreement to obtain the right to buy Acreage Holdings for US$300 million down in cash and the issuance of 0.5818 Canopy Growth shares for every Acreage share held once cannabis is legalized on the federal level in the U.S. is a game changer.  

The tentative acquisition is valued at US$3.4 million. It gives Canopy future access to a business with cannabis licenses in 20 states without running afoul of the New York Stock Exchange or federal lawmakers.

While there is a risk that the feds won’t legalize pot within the seven years of the agreement between the two companies, I believe it’s a risk worth taking. Canopy already has a lot on its plate both here in Canada and overseas, and the delay will give it more time to understand the U.S. market while getting edibles and infused drinks ready for Canadian consumption.

It made a smart move partnering with Constellation Brands to make infused drinks — not to mention bringing an owner with a boatload of global distribution experience onboard — and now it’s looking to dip its toe in the U.S. market.

I, for one, would be shocked if, after the November 2020 U.S. election, cannabis wasn’t legalized within 6-12 months.

In my opinion, Canopy’s deal for Acreage just put Canadian cannabis back on the map.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Will Ashworth has no position in any stocks mentioned.  

More on Investing

how to save money
Investing

The Best TSX Stock for Canadians to Buy With $1,000 Right Now

iShares S&P/TSX 60 Index ETF (TSX:XIU) could be a great starter investment for new investors in Canada.

Read more »

Canadian dollars are printed
Dividend Stocks

Beat the TSX With This Cash-Gushing Dividend Stock

Toronto-Dominion Bank (TSX:TD) stock could do well in the year ahead.

Read more »

monthly desk calendar
Dividend Stocks

Monthly Income: Top Dividend Stocks to Buy in November

Here are two of the best monthly dividend stocks in Canada you can buy in November 2024 and hold for…

Read more »

hand stacks coins
Investing

A Top TSX Stock to Buy Now for Real Wealth Later

Intact Financial (TSX:IFC) stock is a fantastic dividend-growth play for the next 15 years and beyond.

Read more »

tsx today
Stock Market

TSX Today: What to Watch for in Stocks on Thursday, November 14

The U.S. wholesale inflation data and Fed chair Jerome Powell’s remarks about the economy will remain on TSX investors’ radar…

Read more »

Man data analyze
Tech Stocks

3 Reasons Celestica Stock Is a Screaming Buy Now

These three reasons make Celestica stock a screaming buy for long-term investors.

Read more »

profit rises over time
Dividend Stocks

These 2 Dow Stocks Are Set to Soar in 2025 and Beyond

Two Dow Jones stocks are screaming buys but Canadians must hold them in an RRSP or RRIF to avoid paying…

Read more »

TFSA (Tax free savings account) acronym on wooden cubes on the background of stacks of coins
Dividend Stocks

How to Use Your TFSA to Earn Ultimate Passive Income

If you have a TFSA, then you have the key to creating ultimate passive income. All you need is a…

Read more »