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Likely Canopy-Acreage Deal Looks Good Enough to Boost ETF MJ

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Marijuana market is all about inorganic expansion of late. Loads of acquisitions and partnerships have been done in the past year. Talks are now making rounds that Canopy Growth (CGC - Free Report) could purchase the rights to buy Acreage Holdings ACRGF when (or if) marijuana becomes federally legal in the United States at an agreed-upon price, as noted on markerwatch. This acquisition, if it happens, would mark the first key cross-border marijuana deal.

As per sources, the purchase deal could be announced as soon as this week, though nothing is finalized at the time of writing. Acreage shares gained 9.1% and Canopy Growth jumped 2.8% on Apr 17. Canopy shares added a further 6.8% after hours.

Acreage Holdings is one of the largest vertically integrated, multistate cannabis operators in the United States. Canopy is a big name in the space with a market cap of about $14.70 billion. Last August, U.S.-based Constellation Brands (STZ - Free Report) — a leading producer of alcoholic beverages — announced an expansion of its stake in Canopy. The investment was worth about $4 billion. The move corroborates the worth of Canopy Growth as a company (read: Follow Constellation Brands, Bet Big on Cannabis ETFs).

Long-Term Potential of the Deal

Canada has been at the center in cannabis investing as recreational marijuana was legalized there is last October. The legal market for marijuana is way larger in the United States, where sales were about $10.4 billion last year while Canada’s market was worth $1.6 billion. Overall, the North America market grew 30% last year. Another source had noted last April that the U.S. legal marijuana market is expected to witness a CAGR of 24.9% from 2017 to 2025.

Per industry experts, American multistate operators continue to stretch their U.S. market footprint, while the Canadian companies are looking to expand their territory internationally by purchasing foreign assets inexpensively. With the possible legalization of cannabis on the federal level some point down the line and the companies’ increased access to the capital markets, the U.S. market is the new name of the game since Canada’s growth story looks a bit priced-in.

Flurry of Deals Taking Place in the Industry

Aurora Cannabis (ACB - Free Report) made some other big acquisitions last year, including the purchase of Saskatchewan-based CanniMed Therapeutics in May and Ontario-based MedReleaf in July. In late-2018, Aurora Cannabis announced expansion in Mexico with the acquisition of Farmacias Magistrales S.A. This expansion will allow Aurora to have access to the newly legal Mexican medical marijuana market.

Moreover, there were deals like Aphria’s purchase of Nuuvera in March 2018 and Canopy Growth’s acquisition announcement of U.S.-based Ebbu Hemp. In late-2018, Marlboro cigarette maker Altria Group (MO - Free Report) purchased a 45% stake in Canadian cannabis firm Cronos Group (CRON - Free Report) (read: 4 Reasons Why Marijuana Stocks & ETFs Could Be on a High in 2019).

In February 2019,  Tilray (TLRY - Free Report) announced a deal to acquire the world’s largest hemp food maker Manitoba Harvest for up to C$419 million ($318 million) (read: Tilray's Deal to Buy Hemp Food Maker Bolsters Marijuana ETF).

Against this backdrop, we expect more deals to pull off the industry in the coming days.

ETF in Focus

ETFMG Alternative Harvest ETF or (MJ - Free Report) is a pureplay fund in the space. The fund is down 11.1% in the past month. But given the companies’ euphoria for deals, investors can cash in on the beaten down price. However, the fund has added 36.7% this year.

The underlying Prime Alternative Harvest Index of the fund enables investors to take advantage of both event-driven news and long-term trends in the cannabis industry. Aurora (9.73%), GW Pharmaceuticals (9.0%) and Canopy Growth (6.7%) hold the top three spots in the fund, which charges 75 bps in fees.

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