Cantor Fitzgerald this morning released a note speculating on Constellation Brands (NYSE: STZ) purchasing that of Canopy Growth Corp (TSX: WEED) (NYSE: CGC) outright. The note is based on the current equity price of Canopy Growth being far below that of the warrants in which Constellation holds the rights too.
As per the note issued by Cantor, Canopy Growth is currently 35% owned by Constellation Brands following a number of transactions that occurred in late 2017 and 2018, as well as an amended agreement that came into force in 2019. Constellation however has a number of warrants that will allow it to bring itself to a majority ownership upon exercise of approximately 55%, with exercise prices ranging from $12.98 to that of $76.68
The issue however, is that approximately 80% of all warrants owned by Constellation currently have an exercise price in excess of $58.35 per share, which is more than double the current share price of the equity. Only the warrants with an exercise price of $12.98 are currently in the money, of which there are 18.9 million, which will only increase Constellations stake marginally. However, those warrants expire May 2020, and are thus set to either be redeemed or expire soon – which will signal Constellation’s view on Canopy as a whole based on whether or not they get exercised.
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The cause for the speculation on Cantor’s part is a simple math equation – if Constellation waits for Canopy to potentially return to a share price of $77 or higher, the acquisition price is targeted at roughly $8 billion just to acquire its majority ownership through the exercise of currently held warrants. A further $17 billion would then have to be spent to become the sole owner of the cannabis giant.
Comparatively, Cantor notes, if Constellation were to exercise its currently owned 18.9 million $12.98 warrants, and then buy the remaining stake in Canopy Growth at current market prices, even assuming a slight premium, the alcohol giant could potentially acquire all of Canopy Growth for $6-7 billion – a significant discount on a comparative basis. The math is based on an approximate share price of $25.74 for Canopy, which represents a slight premium to the current price of the equity. However, it would still be far cheaper than simply exercising all warrants the company has in return for increasing its stake to 55% versus owning the entire entity.
The struggle with the theory, as Cantor notes, is that Constellation has commitments to its shareholders in terms of buybacks as well as cash dividends, which limits the firms ability to dish out billions of dollars for an acquisition. The other struggle, is that the firm simply doesn’t have the cash on hand. In this mornings earnings, the company reported a cash position of $93.7 million, and current assets of $3.4 billion. However, if the company wishes to do a full blown acquisition, it could potentially offer a mix of cash and shares to current Canopy Growth shareholders.
Canopy Growth last traded at $24.88 on the TSX.
Information for this briefing was found via Sedar, Constellation Brands, Cantor Fitzgerald and Canopy Growth Corp. 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.
