Stifel analyst W. Andrew Carter reiterated a sell rating on Canopy Growth Inc. on Wednesday as he threw shade on the company’s proposal to create Canopy USA to hold its U.S. businesses. Jefferies analyst Owen Bennett and Bill Kirk of MKM Partners, meanwhile, praised the deal.
Another view, from Cantor Fitzgerald analyst Pablo Zuanic, on Canopy Growth’s
move to set up Canopy USA through the issuance of nonvoting exchangeable shares ponders the motivations of Constellation Brands Inc.
Canopy Growth’s largest shareholder.
For the most part, investors continued to take the development as a positive, with Canopy Growth posting a second straight day of double-digit gains. The stock was up 12.5% on Wednesday afternoon.
Jefferies analyst Owen Bennett said Tuesday the Canopy Growth deal opens up the possibility for more cannabis companies to follow suit.
“We see no reason why multi-state operators would not be allowed to do similar [things],” said Bennett, who reiterated a hold rating on the stock. “Any additional capital raised by the U.S. multi-state operator parent from greater access to institutions as a result, could then be loaned to the U.S. holding company as debt.”
Overall, Bennett said, the Canopy USA deal will benefit the company because it triggers ownership of its U.S. assets and consolidates earnings from those units into Canopy Growth’s financial numbers.
Stifel’s Carter, who is more bearish on the transaction, said the addition of cannabis company Acreage Holdings Inc.
to Canopy USA as part of the deal could actually weaken Canopy Growth with an additional C$230 million ($169.5 million) of debt from Acreage.
“Overall, we take a negative view noting the deal does not alleviate Canopy’s risks which are enhanced given Acreage’s financial position,” Carter said Wednesday.
MKM Partners analyst Kirk reiterated a buy rating on Canopy Growth and echoed comments by Jefferies analyst Bennett about positive ripple effects in the industry.
“This restructuring will be widely studied by potential strategics who may want cannabis exposure ahead of federal legislative changes,” Kirk said. He also cited a comment by Curaleaf Holdings Inc.
chairman Boris Jordan, who said the Canopy Growth deal opens up the U.S. for strategic investments.
Cantor Fitzgerald’s Zuanic said the firm was “intrigued” by Constellation Brands’ decision to convert all of its shares of Canopy Growth into exchangeable shares in Canopy USA and vacate its seats on the Canopy Growth board.
“In our judgment, Constellation’s various moves make sense only if it plans to eventually divest the stake in Canopy Growth or plan a full buyout,” Zuanic said.
He reiterated a neutral rating on the stock and increased his price target to $3.05 a share from $2.90 a share.
In a Canadian filing, Canopy Growth said Nasdaq has objected to Canopy consolidating the financial results of Canopy USA in the event that Canopy USA closes on the acquisition of Wana, Jetty or the fixed shares of Acreage.
“Nasdaq has proposed that such consolidation is impermissible under Nasdaq’s general policies,” the filing said. “The company disagrees with Nasdaq’s potential application of its general policies as the basis for its objection since it contradicts the company’s financial reporting requirements under U.S. GAAP including its application to the [cannabis]…businesses.”
Asked about the filing, a Canopy Growth spokesperson on Wednesday reiterated a comment to analysts by CFO Judy Hong that the company has been communicating with Nasdaq and “they are certainly aware of the structure.”
The company is working with the Nasdaq to support compliance with their rules and regulations, Hong said.
While Canopy Growth moved up on Wednesday, cannabis stocks overall traded mixed, with the ETFMG Alternative Harvest ETF
up 0.3% but the AdvisorShares Pure U.S. Cannabis ETF
down by 1.4%.