Cannabis Weekly Round-Up: Constellation Ups Canopy Stake for C$245 Million

- May 8th, 2020

Last week also brought the IPO of Bruce Linton-backed Collective Growth, plus more talk about COVID-19 and US legalization efforts.

This week brought another chapter in the long relationship between a top cannabis company and a large alcohol maker, with the latter deepening its presence in the marijuana market. 

Meanwhile, a new company backed by the former CEO of a major cannabis player made its debut, and questions about how COVID-19 will affect US legalization efforts continued to surface.

Read on for a closer look at some of the biggest cannabis news over the last five days.

Constellation boosts stake in Canopy Growth

At the end of last week, alcoholic beverage company Constellation Brands (NYSE:STZ) exercised warrants issued in November 2017 to purchase common shares of Canopy Growth (TSX:WEED,NYSE:CGC).

Constellation exercised 18,876,901 warrants in aggregate at an exercise price of C$12.9783 per common share, paying a total of approximately C$245 million. The company now owns 38.6 percent of Canopy’s issued and outstanding common shares; if it chooses to exercise its remaining warrants and converts its senior notes it could bump that up to 55.8 percent.

The news spilled over into this week as the market reacted — after closing last Friday (May 1) at C$21.43, Canopy opened Monday (May 4) at C$22.90; it ended lower that day at C$22.22.

“While global legalization of cannabis is still in its infancy, we continue to believe the long-term opportunity in this evolving market is substantial,” said Bill Newlands, president and CEO of Constellation. “Canopy is best positioned to win in the emerging cannabis space and we are confident in the strategic direction of the company under David Klein and his team.”

Klein was announced as Canopy’s new CEO in December and assumed the position in January. He is a former Constellation executive, and took over from interim CEO Mark Zekulin, who came to the role after Canopy co-founder and ex-CEO Bruce Linton was fired last summer.

Constellation has a long history with Canopy, taking a 9.9 percent interest in the company in 2017, and then injecting C$5 billion into the company the following year. Linton has said that his dismissal came after the C$5 billion investment closed as Constellation “wanted a different chair and a different co-CEO.”

Klein is one of many cannabis CEOs looking to streamline operations, and he announced a major strategic shift last month. Some market watchers have suggested that the summer period will be an important time for Canopy’s cannabis-infused beverages; these include upcoming products under the Houseplant brand, which is backed by Seth Rogen and Evan Goldberg.

Linton’s new company raises US$150 million

Cannabis advisory firm Viridian Capital Advisors continues to offer some hope to cannabis market participants concerned about the space after recent coronavirus turmoil — not to mention a tough 2019.

The firm’s latest deal tracker report shows that between April 27 and May 1, the full amount of capital raised in the marijuana market was up year-on-year for the first time in 2020. In total, Viridian tracked 10 transactions that together raised US$171.2 million; that’s up substantially compared to 14 deals totaling US$82.9 million in the year-ago period.

According to the firm, the bulk of last week’s money was raised by the initial public offering (IPO) of Collective Growth (NASDAQ:CGROU), which raked in US$150 million. Collective Growth is backed by former Canopy boss Linton, along with Tim Saunders and Geoff Whaling, also previously of Canopy.

Collective Growth began trading on the NASDAQ last Friday, and was sitting at US$9.96 as of market close this Friday (May 8). The company bills itself as a “blank check” operation that plans to focus on the US cannabinoid market, which includes hemp-derived cannabinoid and fiber products.

The IPO for Collective Growth was originally scheduled for March 17, but was delayed due to COVID-19.

“COVID has in a strange way been very helpful to us because now people are talking about American supply chains and the need to help American farmers and the needs to look for American supplies sustainably,” said Whaling at the time of the IPO.

Opinions split on COVID-19 and US legalization

Cannabis market participants continue to wonder how COVID-19 may impact the industry over the long term, especially in the US, where marijuana is federally illegal.

Opinions are split on whether the coronavirus will help or hinder legalization efforts, with market watchers coming down on different sides of the debate. While some believe the fact that cannabis businesses have been deemed essential in more than half the states in the US is a positive sign, others think that with so many other virus-related initiatives taking priority, legalization will likely lose steam. 

All timelines are being pushed out as far as legalization in any sort of jurisdiction is concerned. It is not top priority anymore. There are a lot more more important things going on,” Nawan Butt of Purpose Investments told the Investing News Network via phone. 

Recent developments show support for both sides of the argument. For example, according to MedPage Today, more than two dozen states in the US are allowing medical marijuana to be prescribed via telemedicine for the first time. This rule change is temporary, but industry experts have said it’s possible that advancements made during the COVID-19 outbreak will not be reversed after it’s over.

On the flip side, news surfaced this week that MassRoots (OTC Pink:MSRT), a tech platform provider for cannabis companies, has received a US$50,000 loan under the Paycheck Protection Program. Cannabis companies have thus far been locked out of that and other coronavirus relief initiatives in the US because the substance is still federally illegal — a point that has been contentious.

While the MassRoots news might sound promising, it is likely too early to get excited — speaking to Law360, CEO Isaac Dietrich emphasized that his company has no actual contact with the plant or its products; in fact, only 3 percent of its cash last year came from cannabis businesses.

Cannabis company news

  • Aleafia Health (TSX:ALEF,OTCQX:ALEAF) secured a Health Canada license amendment for the 30,000 square foot Phase II expansion of its Paris facility in Ontario. Under the amended license, cannabis production will be allowed in the entire expanded building. Aleafia also submitted its application to German regulators for EU Good Manufacturing Practices (GMP) certification; if it receives the certification, it will be able to export cannabis products from the Paris facility to the EU.
  • There was a slew of news from Aphria (TSX:APHA,NYSE:APHA) this week. Like Aleafia, it had EU GMP news this week, receiving certification from Malta. Aside from that, it negotiated a C$127.5 million reduction of its debt, issuing 18.7 million common shares and C$2.9 million in cash to holders outside Canada. Finally, CEO Simon Irwin told BNN Bloomberg that the company recently let go of less than 1 percent of its staff in an effort to consolidate and make strategic changes.
  • Canopy Rivers (TSX:RIV,OTC Pink:CNPOF) announced a C$2 million investment in Dynaleo, a private company focused on white-label manufacturing of edible cannabis gummies for the Canadian market. Canopy Rivers sees potential in Canada’s edibles market, particularly for gummies, and believes Dynaleo is positioned to become a market leader.
  • The latest quarterly results from Cronos Group (TSX:CRON,NASDAQ:CRON) came out on Friday, with the company reporting consolidated net revenue of US$8.43 million, up from US$3 million a year ago. However, it recorded a gross loss of US$6.48 million and an adjusted operating loss of US$40.65 million. According to Cronos, its gross loss was partially driven by an US$8 million inventory writedown on dried cannabis and cannabis extracts.

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Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article.

Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.

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