This Is How It's Done: Why Is Canopy's US Consolidation Plan Blueprint For Other Canadian Cannabis LPs

Canadian cannabis giant Canopy Growth Corporation CGC WEED announced its intention to consolidate in the US via a new holding company dubbed Canopy USA, LLC on Tuesday.

The move, which will streamline the company's entry into the US market, would allow it to acquire Acreage Holdings, Inc ACRDF (70%), Wana Brands (100%) and Jetty (100%) and position itself for legalization of marijuana on the federal level. In addition, Canopy also controls a conditional ownership position, assuming conversion of its exchangeable shares and the exercise of its option though excluding the exercise of its warrants, of approximately 13.7% in TerrAscend Corp. TER TRSSF.

On Wednesday, Canopy announced that Canopy USA, or entities controlled by Canopy USA, acquired 38.9 million exchangeable shares, the TerrAscend option to acquire 1 million common shares and 22.5 million TerrAscend warrants directly and indirectly from Canopy Growth. Following the reorganization, Canopy Growth no longer beneficially owns or controls any securities in the capital of TerrAscend.

Cantor Fitzgerald's analyst Pablo Zuanic said the move provides "a compliant vehicle for the company to quickly consolidate the US THC industry at a time of depressed valuations." In addition, it would also allow the company to maintain both NASDAQ and TSX listings, the analyst continued.

The Analyst

Zuanic retained a "Neutral" rating on the company's stock, increasing its 12-month price target to $3.05 from $2.90.

What's Whit Constellation Brands?

In connection with the proposed transactions, Constellation Brands Inc STZ has expressed its current intention to convert all of its Canopy shares into exchangeable shares and vacate all of its seats on the CGC Board. The move is expected to protect shareholder value while retaining its interest in Canopy through non-voting and non-participating shares.

Zuanic said he is "intrigued" by Constellation Brands' decision, as Canopy has not yet decided on whether the exchangeable shares will be listed in NASDAQ. 

Constellation Brands acquired a stake in Canopy Growth in 2017 for $190 million.

If Constellation decides not to do so, Canopy USA will not be allowed to exercise the rights to acquire Acreage, Wana or Jetty and the floating share arrangement agreement will be terminated.

Instead, it will retain its option to acquire the fixed shares under the existing Acreage arrangement and Canopy USA will continue to hold an option to acquire Wana and Jetty as well as exchangeable shares and other securities in the capital of TerrAscend.

In a scenario where all the deals are closed, Constellation Brands will own one-third of Canopy's pro forma shares. Currently, Constellation Brands owns 171.5mn shares in Canopy Growth and is poised to increase following the CA$100Mn debt conversion.

"STZ's various moves make sense only if it plans to eventually divest the stake in CGC or plan a full buyout," Zuanic said.

Other Canadian LPs Should Follow Suit

Lastly, Zuanic called Canopy's reorganization plan creative, adding that other Cannabis LPs could follow suit.

"There is plenty of creativity in the way CGC has restructured the ownership of its US assets, and we believe this may provide a blueprint for other Canadian LPs," the analyst said.

Jeffries analyst Owen Bennett came to a similar conclusion in his latest note, saying that "this could also have positive implications for MSOs and paths to uplisting, potentially adopting similar structures."

Price Action

Canopy's shares traded 2.0584% higher at $2.9699 per share at the time of writing on Wednesday morning.

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