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Could Canopy Growth’s (TSX:WEED) Deal With Acreage Fall Through?

Canopy Growth (TSX:WEED)(NYSE:CGC) saw its stock get a big boost when the company announced that it had a deal in place to acquire Acreage Holdings (CNSX:ACRG.U) last month. Although the purchase is conditional and might take years before it is realized, that didn’t stop investors from jumping on the bandwagon. The stock ended up climbing to around $70 a share; it hasn’t hit that mark since October.

However, we recently learned that not everyone is thrilled with the acquisition, and there might be a real chance the deal doesn’t get approved by Acreage shareholders. Earlier this week, Marcato Capital Management, which owns 2.7% of Acreage, said that it would be voting against the proposed deal and, in an open letter, stated its concerns.

Marcato believes Acreage is undervalued in the proposed deal

In its letter, Marcato describes the deal as being a “value-destructive transaction and not in the best interests of shareholders.” Those are some harsh words for what would be the largest deal yet in the industry, valued at about US$3.4 billion. One of the items that the letter looks at is the relative price movement of the shares since the announcement, pointing out that while Acreage shares have fallen, Canopy Growth’s have risen, suggesting that shareholders know it’s a much better deal for Canopy Growth than it is for Acreage.

Marcato also believes that Acreage’s valuation, along with other cannabis companies, will “skyrocket” once U.S. legalization takes place. The letter also points out that Acreage didn’t seek out other potential deals and suggests that there could be a “large universe of potential bidders” that would express interest, including from the beer and tobacco industries.

The only problem with that is we haven’t seen many big companies do anything besides kick tires on what’s still a very sensitive industry for them to get involved in. And so it’s a big assumption, to say the least, that there’d be such significant interest given that we’ve seen few large deals thus far, especially involving other industries.

Why the arguments aren’t strong

The letter relies on valuation multiples, price targets, projected 2020 EBITDA numbers, and recent price movement to justify its stance. We’ve already seen in the industry how little valuations matter and how quickly projections can get adjusted, and so to rely on that to make a case is weak at best.

There are too many assumptions built into the reasoning, and Marcato doesn’t recognize Acreage’s own risks in the deal either, that with rising competition and potentially bigger players getting involved, their position in the industry is far from guaranteed.

Bottom line

Ultimately, it’s going to come down to whether Acreage investors can be swayed by Marcato’s points and if they’ll be enough to get the votes needed to nix the deal with Canopy Growth. Activist investors can have a big impact on a stock, even though they lack controlling or significant interest in the company. And with a key investor so strongly opposed to the deal, there’s a real possibility that it might not go through, and that could result in Canopy Growth’s stock seeing a correction.

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Fool contributor David Jagielski has no position in any of the stocks mentioned.

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