Canopy Growth to Cut Ties with VC Arm Canopy Rivers
Canada’s Canopy Growth Corporation (TSX: WEED, Nasdaq: CGC) has agreed to give up its stake in Canopy Rivers (TSX: RIV, OTC: CNPOF), the company’s namesake venture capital firm, in a deal valued at approximately $297 million.
The Smith Falls-headquartered cannabis giant said Monday it would pay $115 million and trade 3.75 million common shares to retire its 27% stake in the VC firm in exchange for additional shares of global cannabinoid company TerrAscend and subsidiary Vert Mirabel.
The arrangement also includes the termination of a royalty agreement related to Canopy Growth’s Tweed NB facility that was recently shuttered.
“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 CEO David Klein said via the release.
The announcement comes as Canopy is taking drastic measures to become a profitable company. The company recently said it would close five facilities in Canada and cut 220 jobs.
Under the agreement, Canopy Growth will forfeit its 36.4 million multiple voting shares and 15.2 million subordinate voting shares. Its two appointed board directors — CFO Mike Lee and Constellation Brands’ CFO Garth Hankinson — will also resign from the Canopy Rivers board.
Meanwhile, Canopy Rivers has agreed to change its name to avoid marketplace confusion and “reflect the new direction of the company.”
Speaking to BNN Bloomberg, Canopy Rivers CEO Narbé Alexandrian called the deal a "clean break," and said the firm woiuld look to invest in the U.S. market following the completition of the deal in the first quarter of 2021.
"I think it is the great opportunity in cannabis right now," he said of the U.S. market.
In exchange for the cash and stock payment to Canopy Rivers, Canopy Growth will increase its stake in TerrAscend from 13% to approximately 21% by acquiring 19.4 million exchangeable shares as well as 2.25 million purchase warrants with an exercise price of $5.95 per share and 333,714 purchase warrants with an exercise price of $6.49 per share.
Canopy Growth will also assume ownership of $13.2 million in debt owed by TerrAscend.
In addition to upping its stake in TerrAscend, Canopy Growth will also take over Canopy Rivers’ position in Vert Mirabel, a facility that is partly owned by Quebec-based tomato greenhouse operator Les Serres Stéphane Bertrand Inc.
In doing so, Canopy will control 67% (up from 41%) of an asset that Klein characterized as a “very important component” of the company’s Canadian operations.
For its part, Canopy Rivers said the deal represents a 5.6x total return on invested capital, and combined IRR (internal rate of return) of approximately 101%.
“This is a transformative transaction for our company that we believe provides substantial value to our shareholders through an enhanced cash position and strategic flexibility, and the collapse of our dual class share structure,” Alexandrian said via a separate release.
Canopy Rivers expects to net about $87.2 million from the deal, excluding the value of Canopy Growth shares which were worth about $125 million as of December 18, 2020.
When the deal closes, Canopy Rivers said it would have approximately $243 million in cash and liquid securities on its balance sheet
“Following the closing of the Transaction, we intend to shift our focus to pursuing other opportunities in the global cannabis market, where we believe that our new strategic focus and substantial balance sheet will allow us to successfully execute our revamped strategic plan,” Alexandrian said.
A two-thirds majority of Canopy Rivers shareholders must still vote to approve the deal. However, JW Asset Management, which will own about 24% of the VC firm upon closing, has already agreed to support the arrangement.
“As an active investor in the U.S. cannabis market, JW Asset Management recognizes the generational opportunity for value creation in the world’s largest and most attractive cannabis market,” JW chairman Jason Wild said. “With a significant infusion of cash and liquid securities, and a new strategic focus, we believe that Rivers will be well-positioned to further explore and potentially capitalize on this vast opportunity.”
Completion of the deal is also subject to certain regulatory approvals, the two companies said.
Canopy Growth established the VC firm in 2017 with an eye toward making strategic investments in the cannabis industry.
The firm’s portfolio currently consist of 18 companies across the entire cannabis supply chain, including data firm Headset, software company LeadLink, and cannabis producer Agripharm, among others.
Additional details are linked in the news release below.