Canopy Growth Corp Inspired Sector Run Expected To Ensue Today

Benjamin A. Smith
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Hold onto your hats everyone, an absolutely epic Canopy Growth Corp (TSE:WEED) (NYSE:CGC) (FRA:11L1) fueled cannabis sector upswing is expected to kick-off in the next 60 minutes. Forget about the company’s earnings report last night, which means next to nothing in the greater scheme. Today is all about this morning’s transformative announcement, which sends shock waves throughout the sector.

Of course, the big news du jour is the news that Constellation Brands Inc. has announced a significant expansion of their strategic partnership with Canopy Growth, in which a 9.9% acquiring interest was cemented last October. Constellation will increase its ownership interest by acquiring 104.5 million shares directly from the company, thereby achieving approximately 38 percent ownership when assuming exercise of the existing Constellation warrants. Further details on warrant exercise prices can be found on the press release.

Furthermore, Constellation Brands is acquiring the new shares at a price of C$48.60 per share, which is a 37.9 percent premium to Canopy’s 5-day volume weighted average price (VWAP) of the common shares on the Toronto Stock Exchange, and a 51.2 percent premium to the closing price on August 14, 2018. Further

From my perspective, the big two takeaways from today’s presser are as follows:

As a result of the transaction, Canopy Growth will immediately, upon closing, have proceeds of approximately $5 billion CAD to bolster its leadership position in the global cannabis industry. That alone would be enough to swallow up nearest competitor Aurora Cannabis Inc., assuming no premium. While that’s obviously not happening, the cash hoard will allow Canopy Growth to build and/or acquire key assets needed to establish global scale in the nearly 30 countries pursuing a federally permissible medical cannabis program.

In other words, Canopy Growth is about to go shopping.

This transaction also provides further (and needed) affirmation that big alcohol and multi-national CPG’s are committed to the cannabis sector for the long term. Not only does the aggregate investment scream “We’re here in a big and lasting way”, the associated premium absolutely confirms it. The acquisition price is right a few cents below Canopy Growth’s all-time high, even though the common shares are (were) trading at a ↓32.68% discount, as of yesterday’s close.

It’s a truly breathtaking, material, and bold maneuver on Constellation’s part. I expect an intense short-covering rally which will be light on fade. Canopy Growth traded as high as $40/CDN in pre-market action so far this morning.

Midas Letter will have more coverage on associated stories throughout the coming days.

Benjamin A. Smith

Benjamin A. Smith

Ben is a research analyst and capital markets professional with nearly 20 years of experience. His areas of expertise are broad-based, and include extensive knowledge of macro economics, stock/derivative trading, commodity complexes, cryptocurrencies and technical/quant analysis. He also maintains an particular affinity for U.S. politics and the macro-regulatory environment facing...
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