Unlike most cannabis multi-state operators (MSOs), Acreage Holdings (OTCQX:ACRGF) hasn’t rallied towards new highs this year. The company has a pending merger to be acquired by Canopy Growth (CGC) at much higher prices. Joe Biden winning the U.S. Presidential election should be more positive for the MSO obtaining a triggering event to close the merger, making the stock very intriguing here.

Image Source: Acreage Holdings website

Improving Fundamentals

The biggest issue with an investment in Acreage since the original deal with Canopy Growth was the company was hamstrung in investing for a potential standalone future. The deal needs the U.S. federal government to pass legislation allowing federal permissibility of cannabis in order for the merger to close since a stock listed on a major U.S. stock exchange can’t own a business that is illegal at the federal level.

Joe Biden has established a cannabis agenda of rescheduling marijuana as a schedule II drug. In addition, the plan includes an aggressive push in legalizing medical cannabis at the federal level and making pot permissible at the state level. His stance was officially updated via this post on Twitter only a week ago.

Regardless, Acreage has improving fundamentals that reduce the risk of owning the stock. Despite most MSOs rallying to multi-year highs, this stock trades at the lows due to the weak fundamentals that required the re-pricing of the deal discussed below.

For Q3, Acreage actually reported that pro-forma revenues jumped to $48.7 million in the quarter. The ongoing EBITDA losses are a primary focus of the company as the MSO quickly shifts toward eliminating those losses, setting Acreage up for survival until a triggering event occurs.

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After a $6.9 million adjusted EBITDA loss in Q3, Acreage forecasts turning profitable in early 2021. Managed Entities generated an EBITDA profit of $4.7 million.

The company has dispensaries in New Jersey setting up the MSO for higher sales growth as recreational cannabis approval just occurred. The move should open up other key states of NY and PA to approve recreational cannabis.

In addition, Acreage only recently launched adult-use sales in Massachusetts on November 10 and opened a second store in Illinois on September 28. The company now owns or manages 29 operational dispensaries in 11 states.

The main issue with the MSO is the lack of scale in any individual state. Florida and Massachusetts have only one open dispensary while Illinois and New Jersey only have two stores. Even the biggest states such as New York and Ohio only have four and five dispensaries, respectively.

Wide coverage of multiple states was probably attractive to Canopy Growth looking for scale, but the spread-out operations don’t help margins and hence profits for Acreage in the meantime.

Numbers That Matter

Back in June, Canopy Growth and Acreage amended the plan of arrangement for the merger. The amendment changes the terms of the agreement to a complicated mix of fixed and floating shares.

Investors need to realize that the original valuation of $5.49 presented in the documents was arrived at when Canopy Growth traded at only $16.71. The stock is now rounded up to $26.87.

The updated value is as follows:

  • Fixed Share @ 0.7: CGC price * 0.3048 shares * 0.7 shares = $5.73
  • Floating Share @ 0.3: $6.41 minimum * 0.3 shares = $1.92
  • Value = $7.65, 176% upside
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Source: Canopy Growth/Acreage amended merger

On the closing of the deal, Acreage shares would have upside of 176% from the current price. The market is clearly worried the triggering event won’t occur fast enough to prevent another amendment or leave shareholders out in the cold as a standalone.

The company is heavily indebted so risk does exist in the event cannabis is never approved at the federal level in the U.S. A move that now appears highly unlikely, but anything is possible when it comes to politics.

Takeaway

The key investor takeaway is that Acreage continues to make progress on becoming a viable standalone MSO. As the company reaches this point, the stock becomes a cheap way to play federal approval of cannabis and obtain shares in Canopy Growth far below the current price. As the rest of the MSOs rally, Acreage could easily become the cheapest way to play federal cannabis approval.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.

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Via SeekingAlpha.com

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