Canopy Growth and Acreage Holdings' $3.4 Billion Deal May Be Good For Industry But Bad For Startups

And you thought today would be yet another mid-April day? Big news from Canada: Cannabis cannabis giant Canopy Growth has agreed to acquire U.S. based medical cannabis firm Acreage Holdings for $3.4 billion. Experts say the deal might be great for the industry but less so for startups.

Still, news of the deal had an immediate positive effect on the stock market as shares of Canopy Growth surged 7.5 percent, reported Reuters. Of course, the real implication of this transaction is that it will usher in Canopy Growth's foray into the significantly larger although still fragmented U.S. market. Recent estimates from marijuana researchers The ArcView Group and BDS Analytics, projected $22.2 billion for both the U.S. recreational and medical markets by 2022 while Canada was projected to generate $5.4 billion for the same time period. Currently, 33 states and Washington, D.C. have legalized medical marijuana while 10 states (plus D.C.) permit recreational cannabis.

Speaking about the acquisition's far-reaching ramifications, Canopy Chairman and co-CEO Bruce Linton told Reuters, “Our right to acquire Acreage secures our entrance strategy into the United States as soon as a federally-permissible pathway exists."

Matt Hawkins, managing principal of Cresco Capital Partners, a cannabis-focused private equity firm that was an early Acreage investor, expressed great enthusiasm over the deal. "Cresco Capital Partners is pleased to have recognized early on what Canopy Growth confirmed today – that Acreage Holdings is the leading license aggregator and operator in the cannabis sector,” he said. “This deal has the potential to be transformative for the industry enabling robust growth for well capitalized companies and its investors.”

Yet not all players will benefit, according to Hawkins. Yes, the deal marks a watershed in the history of the industry as it confirms what movers and shakers already suspected was looming —consolidation. This precedent will heighten the stakes in the market, precipitating larger cannabis firms to merge in order to compete with Canopy/Acreage. Unfortunately, this cutthroat climate might make it difficult for startups and early-stage companies to enter the space and compete with these pot goliaths.

Jeffrey Howard, a managing partner at Northbrook, Illinois-based Salveo Capital, a cannabis-focused private equity, lauds the Canopy/Acreage deal as "massive." However, he’s not surprised by it. “The amount of investment dollars leading to Canadian legalization has now shifted to the U.S.,” he said. “It’s great for the industry even though it’s still politically unclear, obviously.” Still, the deal does indicate “confidence in the progression” toward legalization in the U.S.

Howard concurred with Hawkins about how the deal will usher in consolidation at an escalated rate. “The whole model of this side of the industry being vertically integrated is all about scale,” he said “It’ll be a massive rush—to get as many licenses in as many states as you can possibly can. There is no doubt that side of the industry is one hundred percent going to consolidate around the largest players who have been able to raise the most amount of private and public capital.”

Howard also agreed that the rush toward consolidation may bode ill for startups and small mom and pop shops. But he also added, “I do think this is the tip of the iceberg.”

Iris Dorbian, Forbes Contributor

Sean Doyle