Canopy Growth stock and other marijuana stocks rose on Monday after major investor Constellation Brands (STZ) late Friday moved to increase its stake in the Canadian pot producer, offering a vote of confidence to a company that is scaling back after racking up steep losses.
Constellation, best known for distributing beers like Corona, said Friday that a subsidiary, Greenstar Canada, would exercise nearly 19 million warrants to purchase Canopy Growth stock. The move raised Constellation’s stake in Canopy Growth (CGC) to 38.6%.
The warrants relate to Constellation’s initial investment in Canopy Growth in 2017, and were issued on Nov. 2 of that year. Constellation exercised the warrants at a price of 12.9 Canadian dollars, for a total of around 245 million Canadian. Constellation followed that investment up with a nearly $4 billion investment in Canopy in 2018.
“While global legalization of cannabis is still in its infancy, we continue to believe the long-term opportunity in this evolving market is substantial,” Constellation Brands CEO Bill Newlands said in a statement.
Boost For Cannabis Industry
The warrants to buy more Canopy Growth stock expired on Friday. However, analysts said the move underscored Constellation’s conviction in the cannabis industry.
“While expected with the in-the-money warrants expiring today, this provides capital and further affirmation of Constellation’s commitment to its cannabis platform,” Stifel analyst Andrew Carter said in a note late Friday.
Constellation’s decision also raised speculation about how much more control it might try to exert over Canopy in the future.
Carter said that “We do not believe this accelerates the timetable for Constellation in taking a majority stake.” But Jefferies analyst Owen Bennett said the action suggested Constellation might exercise additional warrants.
“For us, the signal that (Constellation) still plans to take control is a boost, not only for Canopy, but also the overall sector,” Bennett said on Friday as well.
Canopy Growth Stock, Marijuana Stocks Up
With profits largely elusive, IBD’s ratings for Canopy Growth stock and other marijuana stocks haven’t been great. Investors more recently have had to weigh a spike in weed demand, as consumers prepared to hole up as the coronavirus crisis made its way to North America, against the prospect of a steep recession and the marijuana industry’s shaky finances. Some analysts have said they didn’t believe the rush to dispensaries would last.
‘First’ Vs. ‘Best’
The $4 billion investment struck between Constellation Brands and Canopy in 2018 was the biggest in the cannabis industry. It was also characteristic of the splashy deal making made under Canopy’s co-founder and co-CEO, Bruce Linton.
Under Linton, Canopy tried to grab hold of smaller, emerging cannabis markets around the world. The company worked out a cross-border deal to eventually buy Acreage Holdings (ACRG), a U.S. cannabis company whose board members include former House Speaker John Boehner. It also worked out collaborations with celebrities like Martha Stewart, Seth Rogen and Drake.
But losses piled up through last year. Canopy Growth stock fell after some disappointing results. Constellation lost patience.
Linton in July was ousted by Canopy’s board, which was controlled by Constellation higher-ups. David Klein, Constellation’s onetime CFO, eventually took the helm at Canopy. Under Klein, the company has laid off hundreds of employees and closed facilities in an effort to cut costs and steer Canopy toward profitability.
In April, the company said it would exit operations in South Africa and Lesotho, and cease operations at a cultivation facility in Colombia. It also said it would close an indoor facility in Saskatchewan “to further align production in Canada with market conditions.”
Later on last month, the company said it eliminated 200 more positions in Canada, the U.S. and U.K. in an effort to “restructure several departments.”
“For a long time Canopy has prioritized doing things first, but going forward we’ll be focused on doing things the best in the markets and in the product formats that show the greatest promise,” Klein said in an emailed statement.
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