The Constellation Investment Is Proving to Be Canopy’s (TSX:WEED) Most Significant Competitive Advantage

Constellation Brands (NYSE:STZ) exercised warrants to acquire additional shares in Canopy (TSX:WEED)(NYSE:CGC).

| More on:

You may have seen the recent news about Constellation (NYSE:STZ) exercising warrants to acquire additional shares in Canopy (TSX:WEED)(NYSE:CGC). This announcement was easy to overlook, partly because of its timing (the announcement came out after markets closed on a Friday), partly because Constellation is already Canopy’s largest shareholder, and mostly because of everything else happening in the world right now. However, when you dive into the details, you begin to further see how Canopy’s balance sheet and aggressive 2017-2018 fundraising is its biggest competitive advantage in this uncertain environment.

Unlike options that average investors buy and sell in the market, warrants are issued by the company, and when the investor exercises them, it’s the issuing company that gets the money. This means that Canopy will receive the proceeds of the warrant exercise by Constellation ($245 million, less any applicable fees). While the exercise price was $12.98, this price was negotiated back in 2017 as part of Constellation’s initial $245 million investment in Canopy (not the massive $5 billion follow-up investment that occurred in 2018). Therefore, the low exercise price is not a fire sale, but rather, it’s consistent with the terms of the 2017 deal — it was always expected that Canopy would have to issue these shares at $12.98.

This is great news for Canopy, as it further entrenches its position as the leading Canadian licensed producer and the one best positioned to ride out the current market uncertainty. While this recent infusion only represents a 10% increase to the company’s cash and marketable securities balance, as of Q3 2020, it also represents an entire quarter of operating expenses based on the same quarter. Keep in mind that Q3 2020 includes operating expenses that will no longer be incurred going forward, as the company has significantly pared down production operations since new CEO David Klein arrived — so the $245 million will likely be able to cover more than a quarter’s worth of operating expenses, given the company’s new and “right-sized” footprint.

Additionally, as part of the 2018 follow-on financing, Constellation was granted about 140 million new warrants that become exercisable through 2021. While most of these are exercisable at over $50 per share, 51.3 million are exercisable at Canopy’s average price at the time of exercise. While it is far from certain that these warrants will be exercised, if the share price remains depressed for some time, Constellation may very well exercise these 51.3 million warrants, which could provide Canopy with hundreds of millions in additional funds without the need to negotiate with the capital markets for further funding in such a weak environment.

Ultimately, this recent development reinforces the notion that Canopy’s balance sheet is one of its most valuable competitive advantages, primarily because no cannabis company, in the foreseeable future, will be able to raise the kind of money that Canopy did in 2017-2018 at the valuations that it did. This balance sheet will allow it to continue to survive, and even thrive, in the uncertain landscape that we currently find ourselves in.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

The Motley Fool owns shares of and recommends Constellation Brands. Fool contributor Kyle Walton owns shares of Canopy.

More on Cannabis Stocks

Cannabis business and marijuana industry concept as the shadow of a dollar sign on a group of leaves
Cannabis Stocks

Should You Buy Canopy Growth Stock or Green Thumb Stock Today?

Let's dive into two cannabis giants, and which one may be the better pick for long-term investors.

Read more »

Farmer smiles near cannabis crop
Cannabis Stocks

Could Aurora Cannabis Stock Finally Recover by Year-End?

Down 99% from all-time highs, Aurora Cannabis stock is focused on improving profit margins and expanding sales of its medical…

Read more »

Farmer smiles near cannabis crop
Cannabis Stocks

Are Pot Stocks About to Surge Again? 

With pot stocks making big moves of late, many investors are now asking whether the cannabis sector is worth investing…

Read more »

Farmer smiles near cannabis crop
Cannabis Stocks

Can Pot Stocks Aurora Cannabis and Canopy Growth Bounce Back in Q4?

Down over 99% from all-time highs, Canadian pot stocks such as Aurora Cannabis and Canopy Growth remain high-risk bets.

Read more »

Worker tags plants at an industrial cannabis operation
Cannabis Stocks

Can Canopy Growth Stock Finally Recover in 2024?

Down 98% from all-time highs, Canopy Growth remains a high-risk investment in 2024 given its weak fundamentals.

Read more »

Tech Stocks

3 No-Brainer Stocks to Buy With $20 Right Now

These three stocks are easy buys for those who don't have all that much to spend, and want long-term growth…

Read more »

Pot stocks are a riskier investment
Cannabis Stocks

Slow Burn: Is Aurora Cannabis Finally a Good Buy in June?

One of the benefits of choosing from some of the most beaten-down market segments like cannabis is that even a…

Read more »

Caution, careful
Cannabis Stocks

I Wouldn’t Touch This TSX Stock With a 60-Foot Pole

I wouldn't touch Canopy Growth Corp (TSX:WEED) stock with a 60-foot pole.

Read more »