SAN FRANCISCO, May perhaps six, 2019 /CNW/ — Marcato Capital Management LP (“Marcato”), a San Francisco-primarily based investment manager which manages funds that beneficially personal roughly two.7% of the outstanding Subordinated Voting Shares* of Acreage Holdings, Inc. (ACRG-U.CN) (ACRGF) (FSE:0ZV) (“Acreage” or the “Company”), now announced it will vote against Acreage’s worth-destroying proposed transaction with Canopy Development Corporation (TSX:WEED.TO).

Marcato also sent a letter to Acreage’s Board of Directors, which can be located beneath.

May perhaps six, 2019

Dear Board of Directors:

Marcato Capital Management (“Marcato”), the useful owner of 575,000 shares, or roughly two.7% of the outstanding Subordinated Voting Shares of Acreage Holdings, Inc. (“Acreage” or the “Company”), has important capital markets practical experience and a lengthy track record of operating collaboratively with boards of directors to uncover techniques to boost worth.

As a huge Acreage shareholder, we will be voting against the proposed transaction with Canopy Development Corporation (“Canopy”) as we think this is a worth destructive transaction and not in the finest interests of shareholders.

Let us clarify.

The headline transaction worth of $three.four billion is substantially decrease than the fair worth of Acreage primarily based solely on the present worth of Acreage’s future money flows.1

We think Acreage’s strategic worth, as 1 of the couple of multi-state operators of scale in the U.S., with top positions in the most important markets merits a important premium to any stand-alone money-flow derived valuation.  In addition, we think enterprise values of cannabis organizations will skyrocket upon the relaxation of present Federal restrictions.  Accordingly, Marcato believes it is very imprudent for Acreage to sell itself now at the proposed valuation, with so a lot unlocked development and worth embedded in the Firm. 

A single need to have only appear at the efficiency of Acreage and Canopy shares considering the fact that the deal was announced to see that the market place agrees with our evaluation:

  • Shares of Acreage are six.% decrease than exactly where they closed the day prior to the announcement, while shares of Canopy are 15.two% larger over the identical period.
  • In total, Canopy’s market place capitalization has elevated by roughly US $three.five billiontwo since the deal announcement, indicating pro forma financial worth to Canopy of US $six.9 billion — more than 100% higher than the value provided to Acreage shareholders. 

Shareholders of each organizations seem to share Marcato’s view that this is a good deal for Canopy and a terrible deal for Acreage.

The relative worth is unbelievably lopsided in Canopy’s favor. Canopy stock for Acreage stock is just a undesirable deal for Acreage shareholders.

Canopy’s closing value on the day ahead of the deal was announced represents an EV/EBITDA several of 178.2x consensus calendar 2020 EBITDA.  This compares to the Acreage deal worth of US $three.four billion, only 20.7x consensus 2020 EBITDA of $164 million.three  Acreage shareholders are getting asked to exchange an attractively valued safety for a very speculative 1.  Worse, Acreage shareholders have no capacity to predict when, or if, the actual share exchange will happen and ought to finance an extremely higher borrowing expense to hedge their Canopy exposure if they want to sustain their stake by means of any prospective closing period.  Acreage shareholders ought to account for these time and expense uncertainties by discounting the worth of Acreage shares now.  This is precisely why Acreage shares at the moment trade at $22.03 when the money and equity provided by Canopy equates to $31.10, or 41% larger than present share value levels.four

The structure and consideration provided in this proposed transaction just does not build worth for Acreage shareholders.      

The Acreage sale procedure was not made to maximize shareholder worth.

It is our understanding that no other third-parties had been provided an chance to make an present for the Firm prior to executing this transaction with Canopy.  Offered the agreement’s contingency on legalization, we would anticipate that a huge universe of prospective bidders would have the interest and capacity to enter into such a deal.  Possible strategic partners consist of not just other cannabis business participants, but all significant spirits, beer, beverage, tobacco, and CPG organizations.  We query regardless of whether the Acreage Board has fulfilled its fiduciary duty to shareholders by failing to discover all other worth-maximizing solutions ahead of getting into into an agreement that did not consist of at a minimum an business regular “Go-Shop” provision.

Canaccord not too long ago initiated sell-side coverage on the stock at $35/share…yet Acreage’s Board received a fairness opinion from Canaccord at $27.48.  Huh?

Look at that sell-side analyst stock value targets variety from US $31$42, all substantially larger than the $27.48 implied by the deal on the day of announcement.  In specific, it is curious that the Acreage Board received a fairness opinion from Canaccord in help of this deal when Canaccord’s personal analysis analyst published a $35 price target only 4 months prior in his comprehensive initiation report.

For all of these motives and extra, Marcato will be voting NO on the proposed deal.  But then what?

If, and when, shareholders reject the terms of this ill-conceived, worth-destructive transaction, we would favor 1 of two paths:

1) Remain independent.  Our preferred path would see the Firm stay independent, continue to execute on its strategic program, and be patient when taking into consideration strategic transactions till there is higher visibility on the all round U.S. legal and regulatory landscape.

two) Run a formal and competitive sale procedure.  If the Acreage Board insists on pursuing a sale or mixture with a strategic companion, then hold a suitable auction run by a respected investment bank. Invite Canopy to participate along with each and every other significant spirits, beer, beverage, tobacco, cannabis, and customer business, and so forth., and sell the Firm to the celebration that presents the highest consideration in the kind of money and/or important danger-adjusted currency.

We are of course out there to talk about our views with the Board at your comfort.


Mick McGuire

* Subordinate Voting Shares outstanding as of 12/31/18 (21,471,42), Acreage Holdings, Inc. Kind 40-F, four/30/19 
1 Canaccord Genuity, Acreage Holdings, Inc. Initiation of Coverage 12/17/18, “Developing a top national footprint” 
two F/D Acreage shares of 117 million x exchange ratio of .5818 and stated pro forma ownership of 12.1%, implies pro forma F/D Canopy shares of 561 million
three Consensus estimates per CapitalIQ 
four Closing costs as of five/three/19

Media Get in touch with:
Jonathan Gasthalter/Nathaniel Garnick
Gasthalter & Co.
(212) 257-4170

Supply Marcato Capital Management LP