Written by: Kristine Owram – Bloomberg
An investor’s opposition to Canopy Growth Corp.’s acquisition of Acreage Holdings Inc. may signal a new trend for an industry that’s largely been free from shareholder activism.
Marcato Capital Management, which holds Acreage shares, has said it will vote against the deal because it undervalues the New York-based company. Marcato believes the value of pot firms will soar with U.S. legalization, so “it is highly imprudent for Acreage to sell itself today at the proposed valuation, with so much unlocked growth and value embedded in the company.’’
Acreage said the view is inconsistent with “the vast majority of shareholders.’’
Still, it marks the first time an activist investor has waded into the cannabis industry and could be a sign of things to come, according to Bloomberg Intelligence analysts Kenneth Shea and Gopal Srinivasan.
Marcato’s opposition “may be a precursor of rising shareholder ire targeting cannabis companies that are perceived to not be acting in the best interest of all shareholders,’’ the analysts said in a recent note.
High valuations, unprofitable operations and insular ownership structures may prompt activists to get involved in the industry, the analysts said. Rising short interest in some pot stocks is the first indication of investor dissatisfaction, and has pressured companies like Aphria Inc. to make significant changes to their management teams and boards.
Some companies appear to be getting out ahead of this potential trend. Aurora Cannabis Inc. recently hired Nelson Peltz as a strategic adviser. Peltz’s Trian Fund Management LP has a long history of agitating for change at consumer companies, including Procter & Gamble Co., Mondelez International Inc. and PepsiCo Inc.
New York-based pot firm iAnthus Capital Holdings Inc. hasn’t come under pressure from activist investors – in fact, investment research firm Hedgeye Risk Management recently praised its corporate governance. But it’s still in the process of revamping its entire board to make it wholly independent by the end of the year, according to Chief Executive Officer Hadley Ford.
“There absolutely will be’’ a rise in shareholder activism, Ford said in an interview at a cannabis conference last week. “Think about it if you’re a U.S. investor: if a U.S. institution’s going to come off the sidelines and invest in cannabis, we want them to think about coming into us as the bellwether stock to have exposure to that business.’’
It’s inevitable that an industry that was illegal until recently in many jurisdictions (and remains illegal in many more) comes with some baggage, said Dan Daviau, CEO of Canaccord Genuity Group Inc., the Canadian investment bank.
“If you were in this industry 10 years ago you were clearly breaking the law somewhere and you were probably a person of a reputation that didn’t mind breaking the law,’’ Daviau said in an interview. “But the industry is maturing incredibly quickly and I’m not saying you still won’t see the odd company step on a rake and hit their nose, but the propensity for that to happen has slowed down a lot.’’