Canadian marijuana company Canopy Growth saw its shares skyrocketing on news that Corona beer maker Constellation Brands has upped its stake in the company.
Constellation Brands has increased its stake from 9.9% to 38% for a total of $4 billion.
Constellation CEO Rob Sands stated, “Constellation’s incremental $4 billion (5 billion Canadian dollars) investment in Canopy Growth is the largest investment to date in the cannabis industry.”
“Over the past year, we’ve come to better understand the cannabis market, the tremendous growth opportunity it presents, and Canopy’s market-leading capabilities in this space,” he also said.
“As the leader in the total beverage alcohol space, we look forward to reaping the benefits of our cannabis investment, which we see as being incremental to our core beer, wine, and spirits portfolio.”
Canopy Growth founder and CEO Bruce Linton said the investment is “really rocket fuel” and that “it does add quite a lot. As we look around the world, we’re going to be adding production, we’re going to be doing research[…] We’re going to create more products, and we’re going to be way more global.”
Constellation Brands is getting 104.5 million shares of Canopy at C$48.60 in return for its investment. The company also gets 139.7 million warrants, which can be exercised over the next three years, giving Canopy another 5 billion Canadian dollars as well as four seats on Canopy’s board of directors.
If Constellation exercises all of the warrants, it will own more than 50% of Canopy.
Cowen analyst, Vivien Azer, remarked, “[The size of Constellation’s investment] reflects the long-term attractiveness of the global cannabis opportunity beyond the launch of the Canadian adult-use market on Oct. 17.”
SunTrust Robinson Humphrey analyst William Chappel remarked, “We are just not certain what the incremental $4 billion investment brings to Constellation. We remain bullish about STZ’s core business, which is the basis of our buy-rating, but we expect questions about this investment to linger.”
The deal is expected to be accretive by fiscal year 2021.
CEO of Canopy Growth, Bruce Linton, recently did an interview with James West’s Midas Letter where James asked about Constellation’s share price for Canopy, “51.2 percent premium to the average closing price on August 14th. They are 38 percent owners, with the rights to buy up to 51 percent?
Linton responded, “Up to 50. So the way it’s structured, they were at 16.4 percent, because if they exercise their two warrants, which they don’t currently have access to both pieces, but, if they did exercise, that would bring them to 16.4 percent. So they were buying a little bit less than 25 percent of the company, for a little bit more than 5 billion. And then, they have a next tranche, which can move them from 38 and change to almost 50 percent. And that’s at a premium above this premium, and then, if they want to go to 55 percent – and throughout there, they have the preemptive rights, meaning, if we go and buy some, you know, extractor in outer Mongolia, and use shares, they can actually top up to their pro rata position.”
He added, “And we have mechanisms if I want to do secondary or ultimate financing, as to how they get to play. And then the final tranche is, I think I invented it: it’s called a Rainbow, which is, they have the right to purchase up to 5 percent from the treasury on a 5-day VWAP after they’ve exercised the two parts before. And so what I do is, I get their fuel now, and we spend, and we grow, and we dominate, and then they take another bite, I get about another 5 billion, we spend and we grow and we dominate, and then you have this rainbow, which is priced at whatever the stock would be worth on a 5-day VWAP.”
“The reason I call it a rainbow is, and I actually call it a rainbow for several days; it caused some problems for the people doing, how do you analyze something that doesn’t have a future price? But the point was that I and others, as independent shareholders, we want to know, you got to go all the way to there at whatever price is five days, and there’s no cap on what that would be. And so rainbows typically are associated with no specific location, and a pot of gold. So I thought it was a good rainbow.”