September 27 was a big day for both Canopy Growth (NYSE:CGC) and Constellation Brands (NYSE:STZ) as the two parties’ shareholders approved their most recent investment agreement that will enable Constellation to acquire 104.5 million shares of Canopy Growth stock and 139.7 million warrants to buy more shares.
Constellation paid C$48.60 and C$50.40 (1 Canadian dollar = 78 U.S. cents ) for all but 51.3 million warrants. Those warrants are exercisable at the price of Canopy Growth stock over the next three years.
Canopy Growth will get at least C$5 billion from Constellation for the 104.5 million shares. Canopy can also receive another C$4.5 billion from 88.5 million warrants which are exercisable for C$50.40 per share, as well as an unknown possible future amount for the remaining 51.3 million warrants.
Both companies have a lot to gain from the relationship, but for average investors who don’t have as long of a time horizon, is the deal a significant headwind for CGC stock?
A Major Headwind for Canopy Growth stock
I don’t think there’s any doubt that Canopy Growth stock is facing an uphill battle at this point, since Constellation is buying or has the right to buy 193 million CGC shares at an average price of C$49.42 per share or U.S. $38.55.
Canopy Growth stock is trading around $46.70 per share this afternoon, meaningfully above what Constellation will pay for the first and second tranches of shares.
That’s a bit like owning two identical timeshares and selling one unit for $100,000 and another for $74,000.
If you’re the person looking to buy the $100,000 unit, wouldn’t you be asking about the price discrepancy? Darn straight you would.
However, there’s a big difference between timeshares and the cannabis industry.
A Mutually Beneficial Deal
It’s not very often that a business that has generated just C$132 million in revenue over four years and lost millions on those sales gets an opportunity to partner with a company as large and financially solid as Constellation Brands.
Yet here CGC CEO Bruce Linton sits, with C$5 billion on the way and who knows how many billions more over the next three years.
That is the type of deal that CEOs ought to make but often don’t because they’re too afraid to pull the trigger.
The reality is that, although CGC has accumulated a great deal of expertise since its founding in 2014, Canopy Growth still knows very little about mass distribution on the scale that Constellation Brands is used to.
Constellation Brands has years of experience producing alcoholic beverages. A lot of that knowledge was obtained through acquisitions, but it’s expertise nonetheless.
Bruce Linton knew he had to go outside the cannabis world to find that scale and expertise; Constellation Brands CEO Rob Sands knew his company needed to access the kind of knowledge necessary to make cannabis-infused drinks at the level of quality expected of a company with brands such as Corona and Robert Mondavi.
I don’t think there’s any doubt that the risk Constellation is taking is much greater than the risk that came with Bruce Linton’s decision to essentially sell his company at today’s dollars rather than tomorrow’s.
The Bottom Line on Canopy Growth Stock
I don’t think there’s any question that CGC stock is going to be rather volatile over the next 12 months as investors debate whether Rob Sands got a bargain or a bust.
Personally, I would buy Constellation Brands stock if I was interested in Canopy Growth stock. I would then wait to see if CGC drops into the $30s before buying the shares.
Over the long-term, I think this will be a winning partnership, but we won’t know for sure for at least another two or three years.
As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
