Canada’s Canopy to acquire 3 firms in U.S. pot gamble

Canadian pot producer Canopy Growth Corp. isn’t waiting any longer to pull the trigger on acquiring three companies it had planned to buy only when marijuana became federally legal in the U.S.

Chief Executive Officer David Klein said in an interview before an announcement that Canopy will create a new entity, Canopy USA LLC, to purchase the companies — Acreage Holdings Inc., Jetty Extracts and Wana Brands — in which it has options to take control in the event of U.S. legalization.

The deal, which is subject to a shareholder vote, will make Canopy profitable and allow it to create a U.S. “house of brands” that can move into new states and use each company’s intellectual property, even without the federal legal change that the deals were contingent on, he said.

“By triggering the total ownership of Acreage and bringing Jetty, Wana and Acreage under one umbrella, we get to more aggressively take control of our destiny in the U.S. and get these businesses performing better than they are today,” Klein said.

The latest deal is notable because it offers Canopy a U.S. toehold in a business that remains federally illegal. Constellation’s involvement is also noteworthy because larger consumer products companies have mostly kept their distance from marijuana companies based in the U.S..

The use of medical marijuana was legalized in Arkansas in 2016 and a ballot initiative to legalize its use for adults goes before the voters on Nov. 8.

The deal has special provisions that Canopy says will let it avoid running afoul of the federal prohibition of cannabis in the U.S.

For starters, Canopy USA will have its own management, and the exchangeable shares create a protective layer between U.S. operations and Canopy’s core Canadian business. Canopy USA will have its own board of managers and Canopy won’t have voting rights. According to Klein, Canopy has had conversations with both TSX and Nasdaq and is working with the exchanges to ensure continued compliance with listing rules and regulations.

Additionally, Corona and Modelo beermaker Constellation Brands Inc., Canopy’s largest stakeholder and financial backer, can change its common stock investment to exchangeable shares. That would keep its 35.7% ownership stake unchanged while shielding Constellation from more direct involvement with the still federally prohibited substance, Klein said.

Klein added that moving Constellation’s stake to exchangeable shares will make the company “more comfortable and allow them to participate in the upside from what Canopy is doing.” The deal is structured to allow Constellation to convert its stake in Canopy Growth back to Class A common stock at any time, Klein said.

A spokesman for Constellation said the conversion of Constellation’s common stock to exchangeable shares will allow it “to realize the potential upside of our investment in Canopy.”

The company’s strategic shift comes as Canadian pot stocks are suffering — and Canopy is no exception.

Constellation announced in its most recent quarterly report that it was taking a $1.1 billion charge due to its Canopy stake. Marijuana stocks have experienced an industrywide decline due to the perception that legalization is taking too long. Even U.S. President Joe Biden’s announcement this month that a federal evaluation of the drug is underway has failed to reverse stock-market losses.

The deal also gives Constellation a way out of the impact of falling stock values on its own earnings. A Constellation spokesperson said that by giving up its warrants, it eliminates the impact to its earnings and will “further reinforce our intent to not deploy additional investment in Canopy.”

Canopy’s initial deal for Acreage in 2019 gave it an innovative call option on U.S. legalization, which has has since been imitated by other companies, and by Canopy itself. A year ago, Canopy paid almost $300 million in cash for the option to acquire Wana Brands upon legalization. This year it paid $69 million for a similar option to buy Jetty Extracts. The deal doesn’t include another U.S. company that Canopy has a stake in, TerrAscend Corp.

Shareholders and analysts have questioned whether Canopy might enter the U.S. market on a federal legal shift that’s slightly less than full legalization of the drug — such as a rescheduling, or the passing of so-called SAFE Banking law that would give U.S. marijuana companies more leeway to work with banks.

Canopy USA will be governed by a four-person board. Acreage, Jetty and Wana will continue to be led by their existing management teams. Klein said Canopy is considering the creation of a class of exchangeable shares available to all investors, not just Constellation. It would allow those concerned about regulatory ramifications to participate in the space, in an attempt to encourage more ownership by institutional investors.

Cassels Brock & Blackwell, Paul Hastings and Dentons were legal advisers on the deal.