Will Constellation Brands Buy Canopy Growth? This Analyst Discusses Optionality Post Debt Transactions

Canopy Growth Corporation CGC entered into a privately negotiated exchange agreement last week with a holder of the company's outstanding 4.25% unsecured senior notes due in 2023, to secure roughly CA$255.4 million ($198 million) aggregate principal amount of the notes from the noteholders in exchange for common shares of the company and approximately CA$3 million ($2.35 million) in cash for accrued and unpaid interest. The company’s stock plunged 21.7%, following the announcement.

On Friday, the Canadian cannabis giant entered into an additional agreement with a holder of the company's outstanding 4.25% unsecured senior notes to secure roughly $5.7 million in financing.

The followed Canopy’s expansion of its cannabis beverage portfolio by launching its new Just Hits Different brand campaign.

Year-to-date, the stock declined by 71.72%.

The Analyst

Cantor Fitzgerald’s Pablo Zuanic lowered the price target on Canopy’s stock to CA$3.75 ($2.87) from C$6.75 due to the stock/sector derating and reduced estimations, keeping a ‘Neutral’ rating.

The Thesis

With Constellation Brands STZ, which bought a 9.9% stake in Canopy some five years ago, being among the note sellers owning d 142.3 million shares in the company (35.2%), the stake of the alcohol company in Canopy could increase to 43% or even 51%.

“STZ owns a further CA$100Mn in convertible debt and it also holds warrants that could further increase its stake, although these warrants are well out of the money,” Zuanic said in his recent note.

He added that he's not sure that Constellation Brands aims to take full control of Canopy Growth.

In the meantime, last week, Constellation Brands announced a proposal to eliminate the company’s Class B common stock, including those owned by the Sands Family converting them into the right to receive one share of Class A common stock plus cash consideration in the amount of $64.64 per share of Class B common stock, or a total amount of $1.5 billion.

“We wonder about the Sands family’s (controllers of STZ) ultimate plans now that they have merged the share classes at STZ,” Zuanic commented on the news. “Could they sell out entirely and let someone else decide what to do with Canopy Growth? Or if the Sands stay with STZ, does STZ take full control of Canopy Growth?” 

Price Action

Canopy Growth’s shares traded 3.69% lower at $2.61 per share at the time of writing on Wednesday late morning.

Benzinga photo. Source: Pixabay