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The Odds That Canopy Growth's $3.4 Billion Bet Will Pay Off Are Now Better Than Ever

By Keith Speights – Feb 9, 2020 at 2:02PM

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And the Canadian cannabis producer can thank some people in one small Midwestern U.S. state.

Canopy Growth (CGC 7.90%) rolled the dice when it struck a deal last year to acquire U.S.-based cannabis operator Acreage Holdings (ACRGF). The Canadian cannabis producer paid $300 million up front for the right to buy Acreage with a total potential price tag of $3.4 billion. But the transaction would be completed only if marijuana became legal at the federal level in the United States.

The chances of such an occurrence appear to be significantly better now than they were just a few days ago. That means the odds that Canopy's big bet will pay off should be much better as well. And it's all because of politics. 

Shadow of a dollar sign on a pile of cannabis leaves

Image source: Getty Images.

The Iowa connection

The key to Canopy Growth's improving prospects is the 78-year-old independent U.S. senator from Vermont, Bernie Sanders. South Bend, Indiana, Mayor Pete Buttigieg appears to have narrowly won the Iowa Democratic Party caucuses. However, Senator Sanders is in a very close second place.

But Sanders' second-place finish in Iowa has improved his chances of going on to become the Democratic Party's nominee for president. The probability that the Vermont senator could win the nomination is higher than it's ever been, according to RealClearPolitics' compilation of betting odds data.

Former Vice President Joe Biden has led for weeks in the betting odds. Sen. Elizabeth Warren (D-Mass.) has also been at the top in the past. But Sanders now claims a commanding lead after the Iowa caucus results.

This is important for Canopy Growth, because Sanders is the most vocal supporter of marijuana legalization among the Democratic front-runners for president. Last week, he doubled down on his promise to use an executive order to legalize marijuana throughout the U.S., stating that he would take action to do so on his first day as president if elected.

A green rush

Canopy Growth would no doubt prefer that U.S. federal laws banning marijuana would be changed by legislative action. Executive orders such as the one that Sanders advocates can be overturned when another president takes office. However, it seems likely that Canopy would take advantage of any opportunity it could get to rush into the U.S. cannabis market.

Even though Canopy must wait to complete its acquisition of Acreage, the two companies are already working together. Former Canopy Growth CEO Mark Zekulin stated in the company's fiscal 2020 Q2 conference call in November that Acreage is "well into plans to roll out our Tweed-branded cannabis in multiple U.S. states within the fiscal year." He added that Acreage is also "refining plans to open Tweed and Tokyo Smoke-branded dispensaries in select metro locations across the U.S."

If Sanders wins in November and fulfills his vow to legalize pot on Day One of his presidency, the prospects for Canopy Growth and other marijuana stocks could drastically improve. The U.S. is home to the largest cannabis market in the world. With an instant way to leap into that market in a major way via Acreage, Canopy would be way ahead of its Canadian rivals.

Flies in the ointment

There are two potential flies in the ointment, though. First, Sanders still faces an uphill battle to become president. Second, his marijuana policies could severely limit Canopy Growth's ability to establish a huge presence in the United States.

Even though Sanders is now the favorite to capture the Democratic presidential nomination, the odds are still against him. Winning in the general election won't be easy, and winning the Electoral College could be even more daunting.

Assuming Sanders overcomes these obstacles, it still wouldn't necessarily be smooth sailing for Canopy Growth in a Sanders administration. The senator opposes allowing large companies to dominate the U.S. cannabis industry. His approach could make it difficult for Canopy to achieve its goals in the U.S. market.

Despite all of this, however, it's still true that the prospects of near-term marijuana legalization, albeit by executive order, appear to be higher now than they've ever been. Canopy Growth's big bet could still flop, but its chances of success are improving.

Keith Speights has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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