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Canopy Growth Corp. said Tuesday it will no longer wait until federal legalization to buy three U.S. cannabis companies as it eyes opportunities to benefit from strong growth in state-by-state cannabis sales.
Canopy Growth Corp. ‘s U.S.-listed shares
CGC,
WEED,
rallied 26% after the Canadian cannabis company announced a plan to consolidate its U.S. cannabis assets into a new holding company called Canopy USA.
“Our goal is to be the leading North American cannabis company,” Canopy Growth CEO David Klein told MarketWatch. The creation of Canopy USA marks a “logical next step” toward that goal, he said.
Canopy USA will house New York-based cannabis company Acreage Holdings Inc.
ACRDF,
Colorado-based cannabis edibles specialist Wana Brands and California extracts maker Jetty.
Canopy USA intends to exercise its options to acquire 100% of Acreage, Wana, and Jetty, as well as evaluating options for its conditional ownership of TerrAscend Corp.
TRSSF,
Canopy owns a 13.7% stake in TerrAscend.
Third-party investors will hold 100% of the common shares of Canopy USA, the company said.
With the U.S. market poised to reach $50 billion within the next five years, Canopy CEO Klein said he sees opportunities for more growth in U.S. states.
With the Canadian market challenged by oversupply and other issues, the creation of Canopy USA will shift the company’s revenue mix toward the rapidly growing U.S. cannabis market.
Also Read: Canopy Growth sells retail operations but likely got much less than it paid for them, analyst says
Canopy will consolidate its U.S. investments into its financial results for the first time, as well as set up a balance sheet and cost structure flexibility to pursue merger deals or other growth moves in the U.S.
“We put together these assets, but they were operating on their own and not displayed in our financial statements,” Klein said.
Whether or not the U.S. moves ahead with legalization, the creation of Canopy USA “gives us a head start on any regulatory reform to come through,” Klein said on a conference call with analysts.
The new structure through a class of stock called exchangeable shares also allows Canopy Growth to remain in compliance with U.S. cannabis laws and continue trading on the Nasdaq and the Canadian Securities Exchange. “We’ve been in communication with TSX and Nasdaq, they’re aware of the structure,” Klein told MarketWatch.
The U.S. stock exchanges, along with other financial institutions, continue to prohibit shares of plant-touching cannabis companies that do business in legal U.S. states such as California, Colorado, or New Jersey, because of the current Schedule 1 status of cannabis as a controlled substance.
Canopy Growth has no direct control over Canopy USA, which will have its own board of directors. Its ownership position in Canopy USA will be through the issuance of exchangeable shares.
Canopy Growth will also repay $187.5 million of debt, which will reduce its overall debt position by about 27% and cut annualized interest expense to about $26 million. The company is tendering the debt at a discounted price of $930 per $1,000.
Constellation Brands Inc.
STZ,
which invested $4 billion in Canopy when Canada fully legalized cannabis for adult use in 2018, will remain the largest shareholder in Canopy Growth. Constellation will not have a direct ownership in Canopy USA.
As part of the deal, Constellation has agreed to convert its common stock holdings into new exchangeable shares. The transaction will allow it to protect its own shareholder value, while retaining an interest in Canopy in non-voting and non-participating shares.
In turn, that will allow the drinks giant to focus on its core beer, wine and spirits business.
Constellation CEO Bill Newlands said the deal will, “further reinforce our intent to not deploy additional investment in Canopy aligned with [the company’s] previously stated capital allocation priorities.”
Among the next steps, Canopy will hold a shareholder vote to get permission to create exchangeable shares. Acreage also expects to hold a shareholder vote in early 2023 to approve the agreement for Canopy USA to acquire its floating shares, which in turn will set up a path for it to own 100% of Acreage.
Prior to these latest developments, Canopy Growth had entered an agreement 2019 to set up call options to acquire Acreage for $3 billion upon U.S. legalization. It crafted similar deals with Jetty in 2022 for $69 million for a 75% equity interest, as well as a 2021 deal for $298 million with Wana Brands.
While President Joe Biden recently announced plans to review the status of cannabis as a Schedule 1 controlled substance, the process could take years.
Also Read: Cannabis stocks cool off after previous day’s rally as optimism around rescheduling fades
Also Read: Cannabis stocks rocket to a record day after Biden lights the fuse
Meanwhile, Republicans, who tend to be less supportive of cannabis legalization on a federal level, are expected to gain seats in Congress in the coming midterm elections.
At the state level, however, the cannabis business continues to ramp up, and more states are voting on legalization next month.
Canopy Growth shares are down 67% in 2022 compared to a drop of 56% for the AdvisorShares Pure US Cannabis ETF
MSOS,
Shares of Constellation Brands are down 8.5% in 2022, compared to a loss of 20.3% by the S&P 500
SPX,
while Acreage shares have lost 61% of their value this year.
