Shares of cannabis specialist Canopy Growth (NASDAQ:CGC) fell heavily on Tuesday following an eyebrow-raising announcement. Management disclosed that it entered a private placement agreement with select institutional investors. While the deal will help Canopy pay down debts, the discount to Monday’s closing price of CGC stock apparently made many investors uncomfortable.
According to the press release, Canopy entered into subscription agreements (dated Jan. 9) with certain institutional investors involving nearly 7 million units at a price of $4.29 a pop. Overall, the aggregate gross proceeds amount to $30 million. Overall, the purpose is to provide Canopy with additional liquidity to further strengthen its financial position.
Mainly, management expects to use the funds to pay down debt, aligning with the company’s strategy for overall debt reduction. In addition, the money could be directed for working capital and other general corporate purposes.
Moreover, the official statement notes that each unit will be comprised of one common share of the company and one Series A common share purchase warrant or one Series B common share purchase warrant. Each warrant gives the right to the holder to acquire one share of CGC stock at a price of $4.83.
Series A warrants will be exercisable immediately following the closing of the offering (expected to occur on or about Jan. 10, 2024) for a period of five years. Series B warrants will be exercisable six months after the offering’s closing date and ending five years following such date.
CGC Stock Falls on the Implied Discount
Given the terms of the private placement deal, it’s not surprising that CGC stock printed considerable red ink. First, the issuance of warrants presents concerns to current shareholders because of dilution risk. To be sure, warrant holders have the right but not the obligation to exercise. However, if they do exercise, the action increases a company’s outstanding shares.
Second, the private placement imposes a heavy discount to Monday’s closing price of CGC stock of $5.04. Even now, the agreement pegged at $4.29 per share represents a discount to the time-of-writing price in the open market. And it’s a not-insignificant reduction, thus raising eyebrows. Broadly, it communicates a lack of confidence.
To be sure, though, the discounting itself is a known disadvantage of private placements. Essentially, the target shares must be priced low enough to compensate investors for their risk exposure. However, the gap between the discount and open-market price can rub retail investors the wrong way.
Unsurprisingly, options traders are taking the opportunity to place bearish bets against CGC stock. In particular, big block selling transactions hit Fintel’s options flow screener for 1,054 contracts of the Jan. 12, 2024 $5 call and 6,151 contracts of the Jan. 19, 2024 $4.50 call. Basically, speculators are betting that CGC won’t rise materially above the $4.50 and $5 strike prices prior to expiration.
That would enable maximum premium collection or the proceeds involved in selling the call options.
Why It Matters
Is CGC stock doomed to fall further in the near term? Not necessarily, as sold calls represent an obligatory risk to the bears. If shares rise above the aforementioned strike prices, the call writer (seller) would be obligated to fulfill the terms of the contract: sell CGC at the underlying strike prices. If the bearish positions are uncovered, that may cause a panic or “squeeze.”
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
