Canaccord: Canopy USA Transaction Is An Overall Positive
Canopy Growth (TSX: WEED) earlier this week revealed that it would be restructuring its US assets into a more aggressive vehicle that can be boiled down into three sections. The first is an introduction of a US-based holding company, referred to as Canopy USA, in which Canopy Growth will hold non-voting and non-participating shares in. This holding company will exercise Canopy’s agreements to purchase Wana and Jetty, as well as the option to purchase 100% of Acreage’s Class D subordinate voting shares, equating to 70% of the total voting power of Acreage Holdings.
For the second part of this move, Canopy Growth is calling a special shareholder meeting to propose a new class of shares. This new class of shares carries no voting rights but will be exchangeable one-for-one into Canopy Shares. Any investor can convert their common Canopy shares into this new exchangeable share if the proposal passes.
Canopy said this “provides all shareholders of Canopy with the opportunity to self-assess their level of comfort with the Company’s exposure to the U.S. cannabis market.” As there is a risk that the company’s interpretation of laws may differ from “government authorities, securities regulators, and stock exchanges.”
While the last section is that Canopy is trying to rebuild its balance sheet as they have agreed to several adjustments to its debt in hopes that it will help them curry favor in the eyes of investors. It announced it would repurchase US$174.37 million in debt, via two lump-sum payments. One on November 10th, 2022, and the other on or about April 17th, 2023.
The company also said it intends to negotiate an exchange agreement with Constellation to cancel up to the C$100 million senior notes owned by Constellation in exchange for a number of those new exchangeable voting shares.
In conjunction with this news, Constellation brands announced that if the proposal goes through, they will elect to convert their entire holding of 171,499,258 Common Shares to this new non-voting, exchangeable class of shares. They also intend to surrender its 139,745,453 warrants and to terminate the investor rights agreement, administrative services agreement, co-development agreement, and all other commercial arrangements between them and their subsidiaries.
Canopy Growth currently has 14 analysts covering the stock with an average 12-month price target of C$4.26, which puts it at almost fair value. Out of the 14 analysts, one has a buy rating, while seven analysts have hold ratings, another four have sell ratings, and the last two analysts have strong sell ratings. The street-high price target currently sits at C$13 and represents a 220% upside to the current stock price.
In Canaccord Genuity Capital Markets’ note on the news, they upgrade Canopy to a hold rating from a sell rating, while increasing their long-term price target to C$4.25 from C$2.75, saying that this news is overall good for the sector. Though they admit that this news is nothing more than “the aggregation of these assets into Canopy USA combined with the separate issuance of an Exchangeable Share class.”
Canaccord writes, “We believe the ability to consolidate contributions from its US THC exposure under US GAAP Variable Interest Entity accounting would be a significant benefit to the company.” However, management has noted many times that Canopy Growth will hold no economic interest or ownership over the assets. Canaccord adds that management has been vocal in believing the scale of its U.S THC optionality “has not been fully appreciated by the market.”
On the balance sheet restructuring, Canaccord says that although this news helps “alleviate some pressure on a balance sheet that had >US$1B of outstanding debt,” Canopy should continue to look for alternative financing sources as there is $250 million due in July of 2023.
Information for this briefing was found via Edgar and Refinitiv. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.
