SAN FRANCISCO, May well six, 2019 /CNW/ — Marcato Capital Management LP (“Marcato”), a San Francisco-primarily based investment manager which manages funds that beneficially personal about two.7% of the outstanding Subordinated Voting Shares* of Acreage Holdings, Inc. (ACRG-U.CN) (ACRGF) (FSE:0ZV) (“Acreage” or the “Company”), right 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 identified beneath.
May well six, 2019
Dear Board of Directors:
Marcato Capital Management (“Marcato”), the advantageous owner of 575,000 shares, or about two.7% of the outstanding Subordinated Voting Shares of Acreage Holdings, Inc. (“Acreage” or the “Company”), has important capital markets knowledge 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 greatest interests of shareholders.
Let us clarify.
The headline transaction worth of $three.four billion is substantially reduced 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 one particular of the handful of multi-state operators of scale in the U.S., with top positions in the most worthwhile markets merits a important premium to any stand-alone money-flow derived valuation. In addition, we think enterprise values of cannabis corporations will skyrocket upon the relaxation of present Federal restrictions. Accordingly, Marcato believes it is hugely imprudent for Acreage to sell itself right now at the proposed valuation, with so considerably unlocked development and worth embedded in the Organization.
A single have to have only appear at the efficiency of Acreage and Canopy shares given that the deal was announced to see that the market place agrees with our evaluation:
- Shares of Acreage are six.% reduced than exactly where they closed the day prior to the announcement, while shares of Canopy are 15.two% larger over the exact same period.
- In total, Canopy’s market place capitalization has enhanced 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 corporations 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 merely a terrible deal for Acreage shareholders.
Canopy’s closing value on the day prior to the deal was announced represents an EV/EBITDA many 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 becoming asked to exchange an attractively valued safety for a hugely speculative one particular. Worse, Acreage shareholders have no potential to predict when, or if, the actual share exchange will happen and need to finance an extremely higher borrowing price to hedge their Canopy exposure if they want to keep their stake by means of any possible closing period. Acreage shareholders need to account for these time and price uncertainties by discounting the worth of Acreage shares right now. This is specifically 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 merely does not build worth for Acreage shareholders.
The Acreage sale procedure was not developed to maximize shareholder worth.
It is our understanding that no other third-parties had been offered an chance to make an provide for the Organization prior to executing this transaction with Canopy. Provided the agreement’s contingency on legalization, we would count on that a huge universe of possible bidders would have the interest and potential to enter into such a deal. Prospective strategic partners incorporate not just other cannabis sector participants, but all big spirits, beer, beverage, tobacco, and CPG corporations. We query no matter if the Acreage Board has fulfilled its fiduciary duty to shareholders by failing to discover all other worth-maximizing possibilities prior to getting into into an agreement that did not incorporate at a minimum an sector 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?
Take into consideration that sell-side analyst stock value targets variety from US $31–$42, all considerably larger than the $27.48 implied by the deal on the day of announcement. In certain, it is curious that the Acreage Board received a fairness opinion from Canaccord in help of this deal when Canaccord’s personal investigation analyst published a $35 price target only 4 months prior in his comprehensive initiation report.
For all of these causes and far more, 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 one particular of two paths:
1) Remain independent. Our preferred path would see the Organization stay independent, continue to execute on its strategic strategy, and be patient when contemplating 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 reliable investment bank. Invite Canopy to participate along with each and every other big spirits, beer, beverage, tobacco, cannabis, and customer corporation, and so on., and sell the Organization to the celebration that presents the highest consideration in the kind of money and/or worthwhile danger-adjusted currency.
We are of course readily available to talk about our views with the Board at your comfort.
S 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 Make contact with:
Jonathan Gasthalter/Nathaniel Garnick
Gasthalter & Co.
Supply Marcato Capital Management LP http://www.marcatocapitalmanagement.com/