Debra BorchardtStifel analyst Andrew Carter has downgraded Canopy Growth (NASDAQ: CGC) to a Sell rating following the company’s announcement to create Canopy USA. Stifel has a price target of C$2.90, roughly US$2.14. The stock was lately selling at $3.00.
The Canadian cannabis giant said it was creating Canopy USA by exercising options in Acreage Holdings, Wana, and Jetty with plans to consolidate results. Carter said the total cost includes assuming roughly C$230 million of Acreage net debt alongside an implied 76 million Canopy shares with nearly 50% subject to price risk. He wrote, “Overall, we take a negative view noting the deal does not alleviate Canopy’s risks which are enhanced given Acreage’s financial position. This facilitates Constellation Brands’ exit terminating the investor rights agreement, an agreement sometimes viewed as a backstop with Canopy touting the beverage giant as a key partner.”
The Canopy USA deal will also include the pre-money stake in TerrAscend (OTC: TRSSF)(13%). The company suggested discussions with the exchanges are ongoing regarding the ability to consolidate results, but the aim is to drive greater appreciation for U.S. investments. Carter said he has included C$530 million of the value of the three options and noted that Canopy’s disclosures have been limited with key information dispersed across multiple announcements/filings that has created an overly complex situation. He suggested investors have lost interest in the company as it has become difficult to evaluate it. He wrote, “And we remain unclear why Canopy could not have just showcased pro forma results gauging the impact prior to executing these transactions.” For example, per the risk statements, neither Wana nor Jetty have audited financials, and Carter has said that Canopy has demonstrated a poor track record of executing diligence.
Constellation Peaces Out
Canopy in its announcement said that its partner Constellation Brands (NYSE: STZ) was converting its stake to an exchangeable share structure. Carter wrote, “In our view, this is Constellation walking away from its investment with the remaining stake just an option. On the one hand, this removes what we regarded as an underappreciated risk to all other equity holders given the beverage giant’s ability to direct Canopy to operate in Constellation’s best interest with the potential to assume assets of value if liabilities become unmanageable.” He noted that Constellation invested C$5.5 billion of total equity – Canopy is now in a net debt position excluding U.S. investments.
Here’s Why It’s a Sell
Carter says he estimates over C$400 million of cash burn over the next four quarters (F2Q22-F1Q24) with the net debt position increasing to C$470 million following this transaction inclusive of the favorable term debt retirement ($187.5 million, $0.93) and potential convertible exchanges. The Stifel report said that “Canopy is effectively canceling a loan to Acreage ($46 million) while buying an “option premium” for up to $150 million of Acreage debt for $28 million – returned if Acreage repays its debt. This is effectively an insurance policy with Canopy providing restricted cash underscoring Acreage’s credit risk. Year-to-date, Acreage’s total cash burn is $32 million with EBITDA misleading given capital intensity and punitive effects of 280E. The announcement also includes the establishment of a $100 million credit facility which is likely to be an expensive source of capital.”
Sum-of-the-Parts Valuation
- No value for the global cannabis businesses given the significant losses;
- C$17 million for the Canadian retail network;
- C$450 million of value to Canopy for Biosteel, Storz and Bickel, and This Works;
- More than C$1 billion for investments in the U.S. with Wana/Acreage valued at 50% of the capitalized value with Jetty at $69 million.
“We weigh C$1.4 million of value against C$240 million of net debt as well as the $750 million term debt’s remaining interest expense included in the make-whole provision.”
