Canopy Growth (WEED.TO)(CGC) is selling its stake in Canopy Rivers (RIV.TO) back to the Toronto-based venture capital firm in exchange for shares of TerrAscend (TER.CN) and other cannabis assets. The deal effectively severs ties between the two companies.
Under the terms announced Monday, Canopy Rivers will receive $115 million in cash and 3,750,000 common shares of Canopy Growth in exchange for its interests in TerrAscend, Tweed Tree Lot, and Vert Mirabel.
Canopy Growth will give up its voting and non-voting shares in Canopy Rivers. The company will increase its fully-diluted conditional ownership in TerrAscend from approximately 13 per cent to approximately 21 per cent through the acquisition. It also will acquire Canopy Rivers’ stake in Vert Mirabel, a Quebec-based greenhouse venture, bringing its stake to about 67 per cent from roughy 41 per cent.
A royalty related to the recently-closed Tweed NB facility has also been cancelled. The arrangement had two years remaining. Its cancellation is expected save Canopy Growth $2.9 million in cash annually.
Canopy Rivers shares climbed their highest level since June on Monday, rising nearly 40 per cent to $1.27 at 12:15 p.m. ET. Canopy Growth’s Toronto-listed shares fell 2.55 per cent to $32.43.
The complex exchange of cash and stock comes amid major changes at Canopy Growth that have recently included shuttering several Canadian cultivation facilities, large-scale layoffs, and narrowing the company’s focus to the Canadian, United States and German markets.
“With our new strategy in place, it is appropriate for us to divest our interest in Canopy Rivers to increase our focus as a company,” Canopy Growth chief executive officer David Klein stated in a news release.
Canopy Growth established Canopy Rivers in 2017 as a strategic investment vehicle. The firm currently has a portfolio of 18 companies in the cannabis sector.
Canopy Rivers to flow to U.S. pot market under new name
Canopy Rivers said the implied total transaction value of the deal is $297 million. CEO Narbe Alexandrian called it a “transformative” enhancement to his company’s cash position that will allow greater flexibility to pursue opportunities beyond Canada, especially in the U.S. market.
Canopy Growth members on the Canopy Rivers board, chief financial officer Mike Lee and Constellation Brands (STZ) CFO Garth Hankinson, will resign their seats once the deal is closed. (The New York-based beer and wine giant is the largest shareholder in the world’s most valuable cannabis company.)
“Now is the time for us to really spread our wings and enter the hottest and most undervalued market,” he told Yahoo Finance Canada in a phone interview. “We’ve been itching to go (to the United States) since forever.”
Speaking with Yahoo Finance Canada in September 2019, Alexandrian said “Canada is pretty much played out” with respect to investment opportunities in new licenced producers. In July, he cast doubt on the seed-to-retail vertical integration model of large cannabis companies, such as Canopy Growth.
Canopy Rivers will change its name to reflect the split from Canopy Growth. Alexandrian said a new moniker has not been chosen, and he expects to release more details about the company’s new, more American identity in early 2021.
“We’re looking at different options that are out there, whether it’s for investments or acquisitions or potentially even a merger with another company. We’re just an ideal candidate,” he said. “We don’t have the convertible debt bombs that some other companies have. We don’t have liabilities on our books that scare people. We’re going to go in with just pure cash.”
Having shed its formal ties to the Canadian licenced producer, Canopy Rivers said it may de-list from the Toronto Stock Exchange in order to pursue investment opportunities in the U.S. market that run afoul of rules around ownership of U.S. cannabis assets.
Alexandrian said it is too early to discuss potentially re-headquartering south of the border, and how such a move could impact the firm’s Canadian staff.
The deal is subject to approval by a two-thirds majority vote by holders of Canopy Rivers multiple voting and subordinate voting shares, voting separately on a class basis, as well as a majority of disinterested holders of subordinate voting shares.
Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.