Canopy Growth Corp. said Tuesday it will no longer wait until federal legalization to buy three U.S. cannabis companies amid opportunities to benefit from strong growth in state-by-state cannabis sales.
Canopy Growth Corp. ‘s U.S.-listed shares
CGC,
WEED,
rose 3.9% in premarket trade on Tuesday after the Canadian cannabis company announced a plan to consolidate its U.S. cannabis assets into a new holding company called Canopy USA.
The holding company has an exchangeable share structure aimed at triggering full ownership of U.S. cannabis investments.
Canopy USA will house New York-based cannabis company Acreage Holdings Inc.
ACRDF,
Colorado-based cannabis edibles specialist Wana Brands and California extracts maker Jetty and allow Canopy to exercise rights to own 100% of the companies.
Third-party investors will hold 100% of the common shares of Canopy USA, the company said. Constellation Brands Inc., which invested $4 billion in Canopy when Canada fully legalized cannabis for adult use in 2018, will remain the largest shareholder in Canopy Growth. Its ownership stake remains unchanged following this announcement, but Constellation will not have a direct ownership in Canopy USA.
Canopy Chief Executive David Klein said the company expects the U.S. market to be worth more than $50 billion by 2026. The new structure allows Constellation to remain in compliance with U.S. cannabis laws.
Constellation
STZ,
will convert its common stock holdings into new exchangeable shares. The transaction will allow it to protect its own shareholder value, while retaining an interest in Canopy in non-voting and non-participating shares.
In turn, that will allow the drinks giant to focus on its core beer, wine and spirits business.
Constellation CEO Bill Newlands said the deal will, “further reinforce our intent to not deploy additional investment in Canopy aligned with [the company’s] previously stated capital allocation priorities.”
The deal also allows Constellation to stem its losses. At last check, Canopy Growth’s market cap is about $1 billion. In its second quarter ended Aug. 31, Constellation booked a $1.06 billion impairment charge on its stake in Canopy Growth.
Prior to these latest developments, Canopy Growth had entered an agreement 2019 to set up call options to acquire Acreage for $3 billion upon U.S. legalization. It crafted similar deals with Jetty in 2022 for $69 million for a 75% equity interest as well as a 2021 deal for $298 million with Wana Brands.
While President Joe Biden recently announced plans to review the status of cannabis as a Schedule 1 controlled substance, the process could take years.
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Meanwhile, Republicans, who tend to be less supportive of cannabis legalization on a federal level, are expected to gain seats in Congress in the coming midterm elections.
On the state level, however, the cannabis business continues to ramp up, including more states voting on legalization next month.
Canopy Growth shares are down 32.3% in 2022 compared to a drop of 45.5% by the AdvisorShares Pure US Cannabis ETF
MSOS,
Shares of Constellation Brands are down 8.5% in 2022, compared to a loss of 20.3% by the S&P 500
SPX,
while Acreage shares have lost 61% of their value this year.
