John SchroyerA deal years in the making was solidified on Friday, when shareholders of one of the largest Canadian marijuana companies, Canopy Growth Corp. (TSX: WEED) (Nasdaq: CGC), voted to formally authorize the company’s entrance into the U.S. cannabis market via a trio of acquisitions.
The deals – first announced nearly two years ago – will allow Canopy to finalize the acquisitions of multistate operator Acreage Holdings Inc. (CSE: ACRG.A.U, ACRG.B.U) (OTCQX: ACRHF, ACRDF), along with marijuana brands Wana and Jetty, through the creation of a complicated exchangeable shares program.
The exchangeable share program, CEO David Klein told Green Market Report in an interview on Monday, will allow one of Canopy’s biggest investors – alcohol titan Constellation Brands – to keep itself at arm’s length from the marijuana plant-touching operations of Acreage, Jetty and Wana, while also ensuring that Canopy can continue trading on the Nasdaq.
The vote on Friday, Klein said, was the culmination of nearly two years of work to gain the blessing of the U.S. Securities and Exchange Commission in creating Canopy USA, a move which the SEC initially balked at when Canopy shared news of the acquisitions in 2022. Now, the acquisition deals of Jetty and Wana are expected to close in the second quarter of Canopy’s 2025 fiscal year, while the Acreage acquisition will close by the end of the 2025 fiscal year.
This interview has been edited for length and clarity.
It seems like the shareholder vote to finalize the acquisitions of Wana and Jetty and Acreage was precipitated by the anticipated federal rescheduling of marijuana this year in the United States. Is that right? Or was it precipitated by something else?
We started this work in October of 2022. And the concept was, we’ve always felt that the U.S. is the best market in the world in terms of scale and profit pools. We have a few investments in U.S. businesses, but they operate autonomously. So we wanted to find a way to put Wana and Jetty as branded businesses together with Acreage, kind of positioned in New York, New Jersey, Pennsylvania, Ohio, Illinois, those key states. We felt that they needed to function as a single business, not a bunch of disparate businesses working together. So the real point of the Canopy USA structure was really to merge those businesses, and then use that as a platform to look at other things we might add into it. A lot has been said and written about the structure that we use. For me, the real point was to bring the businesses together and figure out a way that we could continue to keep our Nasdaq postings.
Correct me if I’m wrong, but the original acquisition deal back in 2022 was contingent on federal marijuana legalization, or at least some kind of federal reform, was it not?
Yeah, that was really a structural thing. There were a lot of triggers put into our documents so that we wouldn’t inadvertently end up taking, controlling, we couldn’t have a (situation that) would cause us to have to effectively become a plant-touching company inadvertently. So we put in all of these roadblocks – all of which we can waive – to ensure that we didn’t again, inadvertently become a plant-touching company. The assumption was, that we would bring all of this together simply after federal legalization. And I’ll tell you that when Constellation Brands made their investment in Canopy in 2017, the thesis assumed full federal legalization by 2023. It seemed like there was good momentum, we’ll probably get there. Now I don’t know if we’ll see whatever we define as full federal legalization in our lifetimes at this point.
What makes us feel good about this Canopy USA structure is we don’t need any more federal regulatory reform. Now, we would love 280E reform, just like everyone would. But we don’t really need a lot more beyond where we sit today in order for our businesses to perform well. But the way we set this up, having them as disparate businesses, that’s not optimal over time as you’re trying to grow pro-business.
Canopy has also changed a lot of its focus in recent years, and diversified internationally, as the company has faced major headwinds at home along with financial losses. Was that a factor in pushing the Canopy USA expansion and these acquisition deals?
We’ve dramatically improved our gross margins in Canada, and now we have a backbone that we can build on. And I might argue that, if you ever do a comparison of price-to-consumer in Ontario versus New Jersey, you definitely know you want to be selling in New Jersey, not in Ontario. But we’ve figured out a way how to make our Canadian business work with good gross margins. We want to bring that know-how to the U.S. as soon as we can. Then we look at our international business, and we’ve seen a lot of growth that has really good margins. We’ll see where we go with Germany; from our perspective, we’ve always sold in the medical channels, and everybody’s gonna have to keep selling in medical channels. And then our Storz & Bickel business, which we sell a lot in the U.S. and other markets as well. So we felt like we now finally have a business that we’re comfortable with, that’s at the Canopy Growth level. And then we have these investments that we’ve made in the U.S., and we just want to make sure that those businesses are performing as well as they can, and we can use that as a platform for further growth in the U.S. So it started out, how do we merge these businesses and get them working together? The goal would be to have Wana and Jetty on the shelves of every single dispensary in every single market that we’re in. So it was really more of that level of strategy that got us to come up with the structure. And then it just took longer than we would have liked to implement the structure because of getting regulatory approval.
What were some of those hurdles that you guys had to deal with? The shareholder vote has been in the works since then, basically, since October 2022?
Yeah, it was really getting the SEC comfortable with exactly how we proposed to run this going forward. So it took a lot of time. And ultimately, we ended up in a in a good spot. It just took a long time.
You mentioned during the company’s earnings call a couple of months ago that the possibility of rescheduling in the U.S. could have a significant appreciative value effect for Canopy, Wana, Jetty, and Acreage, all of them basically. How much in value are you expecting those three assets to, appreciate?
We haven’t said anything officially from a public standpoint, and I’m cognizant that we haven’t closed on the Acreage purchase yet. So I don’t want to speak for them. But it’s meaningful as a percentage of EBITDA or current cash flows. It’s not what Curaleaf would have available to them, but it’s in line with the EBITDA level of a business like Acreage and Wana and Jetty. I don’t have a specific number; it’s just truly is meaningful versus their EBITDA.
The statement that you issued Friday was really optimistic about rescheduling. I have to ask, do you have any new intel on when there’s going to be any sort of formal news from the Biden administration or the DEA?
No, where I get my intel really is from David Culver, who used to work for us and is now at U.S. Cannabis Council. There’s a lot of positive rhetoric, and someone has to turn that into reality. I’m optimistic that we get movement, and I’m also optimistic because you’re seeing people amend tax returns and file tax returns as if they didn’t have to deal with the 280E mandated exclusions, and so now, it’s a function of, how long does it take? How long does it take the DEA and then ultimately the executive branch to finalize something? I don’t think we can guess timing on regulatory matters at this point.
Was there any complexity or hurdles in working with the Nasdaq on this? If I understand this deal correctly, it’s going to ultimately make Canopy one of the latest cannabis plant-touching companies trading on the exchange. There are a few others, like Aurora Cannabis, Chronos, but not many. Was there any issue with negotiating that, or is the marijuana business something that the Nasdaq is now comfortable with?
We’re really clear on what allows us to trade on the Nasdaq, and that is our legal cannabis business in Canada and internationally and so forth. That’s fine to trade on the Nasdaq. The Canopy USA entity is not going to be consolidated into our results; it will be a supplemental disclosure. But it’ll be very apparent to investors. What we offer is kind of a unique exposure, in an environment like the Nasdaq to our non-U.S. cannabis businesses, while having exposure to the U.S. business, but the difference is, our team isn’t gonna go in and start running the U.S. business. That will be run by (Wana Brands CEO) Nancy (Whiteman) and the Acreage team and the Jetty team, with the right structure there. So we believe we very cleanly complied with the Nasdaq requirements. But that’s partly why we had to, you know, we were threading a bit of a needle here to get it. All right. And that’s part of what took so long.
What can you share about future plans for those three subsidiaries? Are you planning on expanding into every U.S. state market over time, or what can you share as far as long-term plans?
Wana’s in a bunch of markets already. Jetty is just starting to expand out of California. So they’re in Colorado and New York, and just recently in New Jersey, so we’d like to see more expansion out of Jetty. The Wana innovation that continues to come around is what differentiates us over time. And so our growth, I think, is more likely to come from new product offerings than it is from new markets because they’re already in many of the markets that matter in the U.S. They’re also looking at potential international expansion. And I think there’s a lot more to be done with the Acreage brands over time. We would look to use that as a platform to see if there are other brands or offerings that we would want to bring into the Canopy family.
Any reason that the Acreage acquisition is going to take longer than the one and Jetty deals to close?
Yeah, because of the number of states they need approval in. The hardest state to get approval in is Massachusetts, and it takes a while to get that done. We can’t close on that whole transaction until we get all of the state approvals. So Wana, Jetty, those approvals will come very quickly. Acreage will just take longer.
And will Constellation Brands own any shares of Canopy USA?
No, but what they do own – and what the vote was, by the way – was to create a class of exchangeable shares, which Constellation will go into, and those exchangeable shares they feel like give them an extra layer of protection as we get closer to these plant-touching businesses. And so Constellation remains invested in Canopy and will for the foreseeable future. You could argue that they agreed to go in those exchangeable shares to facilitate us getting Canopy USA done. So they’re super supportive, but they won’t own shares directly in Canopy USA.
