Canopy Growth (TSX: WEED) evidently thinks its the smartest cannabis company on the street, announcing this morning that it has found a means of accelerating its entry into the US cannabis market, despite federal legalities. The firm has established a new US-based holding company, Canopy USA, through which it will hold all of it’s US assets.
The strategy will enable the company to exercise its rights to acquire the Wana, Jetty, and Acreage Holdings assets, as per the previously agreed to arrangements with those firms.
The move is being referred to as “stepping stone” transactions, which will enable the company to be “strategically repositioned to capitalize on the benefits of complete ownership and control of its US THC portfolio of assets upon US federal permissibility.” The method effectively appears to be a way that the company, despite its falling relevance in the Canadian cannabis markets, can push its “success” to investors, by referencing the financial results of Canopy US within its own results, even if the assets can’t yet be placed on the firms books.
Canopy US is notably to have its results consolidated under US GAAP standards, which the company says will then enable the firm to “highlight the value of its US THC assets to investors.”
Canopy US, upon full exercise of its previously entered into arrangements, will have a footprint in a total of 21 states, largely thanks its investment in Acreage Holdings. The company can acquire a 70% stake in the company initially at a rate of 0.3048 Canopy shares per fixed Acreage share, while the firm maintains an option to acquire the remaining 30% of the firm as well. The company also has the rights to acquire Wana, an edibles brand with a presence in 13 states, and Jetty, a Cali-based extracts firm.
The company will also have a 13.7% interest in TerrAscend Corp (CSE: TER).
The entire transaction will see Canopy USA operate as a stand-alone entity, with Canopy Growth not holding a direct interest in any of the individual assets. Canopy Growth instead holds non-voting and non-participating shares in Canopy USA. The non-voting shares are convertible into common shares of Canopy USA. Canopy Growth will maintain two seats on the four person board of Canopy USA, and has entered a “protection agreement” for certain negative covenants. The company maintains it currently has “no economic or voting interest” in Canopy USA, and won’t until the shares are converted to common shares.
Notably, shareholders of Acreage, Wana, and Jetty will receive shares in Canopy Growth as part of the transactions closing as per the original terms of those agreements. In exchange, Canopy Growth will be compensated with additional Canopy USA shares as consideration for the transaction.
The ability to pump the firms US assets however isn’t coming cheap. Canopy has agreed to issue Wana shareholders shares in Canopy USA at 7.5% of the total transaction value, which can be repurchased with a call option.
The firm is also issuing $50 million in Canopy shares to certain unit holders of High Street Capital Partners, which is a subsidiary of Acreage, to reduce a potential liability of $121 million. A subsidiary of Canopy has also agreed to purchase an option to acquire up to $150 million in debt from Acreage’s lenders, paying $28.5 million to the debtholders for the option.
The transaction is expected to be completed in 2023, following a special meeting of shareholders to be held in January approving the transaction.
Separately, the firm this morning indicated it has entered arrangement to pay down US$187.5 million in debt at a discounted amount of US$174.4 million, with the debt to be paid off in two installments, which are marked for November 10 and April 17, 2023.
The company will also cancel C$100 million in senior notes owed to Greenstar (a subsidiary of Constellation Brands) in exchange for the issuance of exchangeable shares. Constellation also intends to convert all of its ownership in the company to exchangeable shares, resulting in the cancellation of all warrants, along with any investor rights agreements. The move would also see Constellation lose the ability to nominate persons to the board of directors, and will lose approval rights on certain transactions. If the shares are not converted to exchangeable shares however, the creation of Canopy USA will not proceed.
Canopy Growth last traded at $3.15 on the TSX.
Information for this briefing was found via Sedar and the sources mentioned. The author has no securities or affiliations related to the organizations discussed. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.
As the founder of The Deep Dive, Jay is focused on all aspects of the firm. This includes operations, as well as acting as the primary writer for The Deep Dive’s stock analysis. In addition to The Deep Dive, Jay performs freelance writing for a number of firms and has been published on Stockhouse.com and CannaInvestor Magazine among others.