Canopy Growth Corp (NYSE:CGC) CEO Bruce Linton on $5 Billion Takeover by Constellation Brands (NYSE:STZ)

Midas Letter
Midas Letter
Canopy Growth Corp (NYSE:CGC) CEO Bruce Linton on $5 Billion Takeover by Constellation Brands (NYSE:STZ)

Canopy Growth Corp (TSE:WEED) (NYSE:CGC) (FRA:11L1) was the recipient of what was effectively a $5 billion takeover by NYSE-listed Constellation Brands (NYSE:STZ). Bruce Linton, CEO and Chairman of the Board of Canopy explains how he first got the attention of Constellation CEO Robert Sands that led to the historic partnership.


James West:    Hey, welcome back to Midas Letter Live. My guest in this segment probably doesn’t need much introduction. Oh, we’ll give him an introduction – Mr. $5 Billion Man himself, Bruce Linton, CEO and founder of [drums] Canopy Growth Corporation.

Bruce Linton:  Wow, man, I thought maybe you got the 5 billion. Got the new studio…

James West:    I feel like I did.

Bruce Linton:  You know, I come in, the signage is upgraded…

James West:    It’s a proximity thing.

Bruce Linton:  It’s good, I like it.

James West:    It is, it is.

Bruce Linton:  Fancy microphones.

James West:    Yeah. We’re making movies now. [laughter]

Bruce Linton:  Wow. You’re presenting your business plan, which was, “I’m going to get a lot of content and I’m going to spend a lot of money doing it, and then I don’t know what happens next,”, you seem to have made an evolution off of that.

James West:    Right. Well, actually, you didn’t read to the end of the business plan.

Bruce Linton:  Do you remember that in my lobby?

James West:    Yeah.

Bruce Linton:  So this is a good business plan, except it’s missing the business part. It’s more like a content part.

James West:    I actually did write this business plan back in 2012, and we are executing on that business plan, with some minor variations, largely thanks to the cannabis revolution. So, you know, I wouldn’t go so far as to say I couldn’t have done it without you, because I would have died trying, until some market came along. But enough about me.

Bruce Linton:  Well, I’m obviously supporting you, because you are the last stop on the media mayhem before I go back to regularly scheduled programming.

James West:    I’m honoured.

Bruce Linton:  And it’s only about 90 degrees outside, humidity is somewhere north of 90 percent, I’m wearing a suit, and I walked part of the way to get here. So James, talk to me.

James West:    All right, Bruce. The Constellation deal: now, they’ve given you a valuation of, what is it, 38 percent – sorry, whoa, let’s back up here.

Bruce Linton:  So it was about a, more than 50 percent.

James West:    51.2 percent premium to the average closing price on August 14th. They are 38 percent owners, with the rights to buy up to 51 percent?

Bruce Linton:  Up to 50. So the way it’s structured, they were at 16.4 percent, because if they exercise their two warrants, which they don’t currently have access to both pieces, but, if they did exercise, that would bring them to 16.4 percent. So they were buying a little bit less than 25 percent of the company, for a little bit more than 5 billion. And then, they have a next tranche, which can move them from 38 and change to almost 50 percent. And that’s at a premium above this premium, and then, if they want to go to 55 percent – and throughout there, they have the preemptive rights, meaning, if we go and buy some, you know, extractor in outer Mongolia, and use shares, they can actually top up to their pro rata position.

And we have mechanisms if I want to do secondary or ultimate financing, as to how they get to play. And then the final tranche is, I think I invented it: it’s called a Rainbow, which is, they have the right to purchase up to 5 percent from the treasury on a 5-day VWAP after they’ve exercised the two parts before. And so what I do is, I get their fuel now, and we spend, and we grow, and we dominate, and then they take another bite, I get about another 5 billion, we spend and we grow and we dominate, and then you have this rainbow, which is priced at whatever the stock would be worth on a 5-day VWAP.

The reason I call it a rainbow is, and I actually call it a rainbow for several days; it caused some problems for the people doing, how do you analyze something that doesn’t have a future price? But the point was that I and others, as independent shareholders, we want to know, you got to go all the way to there at whatever price is five days, and there’s no cap on what that would be. And so rainbows typically are associated with no specific location, and a pot of gold. So I thought it was a good rainbow.

James West:    Wow. Suzanne, put me on the bid for 10,000 more shares, please! So, what are you going to do with $5 billion?

Bruce Linton:  Well, it’s actually, it’s sort of like a reverse-order things, right? Where they wanted to get to was this investment; the premium they pay was a change of control. Then you, by default, get $5 billion. So what you say is, with $5 billion, how much would I allocate to international evolution and execution, acquisition of properties and building things out? We’d probably find it about 40 percent is likely to be the right number. You say, well, how could you spend that much? Well, if you look at Canopy today, for Canada, we have about $1.4 billion of tangible assets on our book.

So, we have 11 other countries we want to be in. 2 billion doesn’t seem like it would be enough. Then you got this other chunk which we’d be thinking about how do I vertically stack and finish everything I want, from how do I get down to extraction platforms that go right to the API, so the single cannabinoids. How do we get those to be restructured into formulations and delivery mechanisms so we can do clinical trials, get outcomes, get DINs, run that race? Because those will have a lot of strength in other markets once you have the security here, because you have the IP.

James West:    Right.

Bruce Linton:  And then you might want to keep a good chunk of that to also look at, okay, if we can make beverages in Canada, suppose we can? Suppose we’ve invented them, suppose we perfect them, we brand the hell out of them; do you need a bottling and canning line to do that? Yes, you do. So we would build those things, with Constellation.

James West:    You wouldn’t just buy them?

Bruce Linton:  No, because I want it in proximity to our facility.

James West:    In Smith Falls.

Bruce Linton:  Yeah, and I want to have, I don’t want to have somebody say, well, you asked to get three square bottle styles, and the market only likes round bottles and it’ll be six months till we change to the round bottle system.

James West:    Ah, I see.

Bruce Linton:  I’m good with, like, six minutes, six hours, so if you don’t own it, you don’t control it; if you don’t control it, you can’t agilely turn to where you want to be.

James West:    Sure.

Bruce Linton:  And so that’s kind of, you know, you start working your way through and all of a sudden you’re going, that’s quite a lot of money! And, you know, there is an opportunity where we could see really significant growth in our company, because as you know, we’ve been pretty good at getting provinces to sign up. And I don’t care if you’re selling it online, in a store, in the store by the government or somebody else; right now we’re looking at about a minimum 67,000 kilograms that have been signed up, plus whatever Ontario wants, plus the fact that we have the biggest market share medical. I think that means there’s a baseline revenue that’s pretty substantial, which should mean that we’re not actually eating heavily into the cash to run our business at all.

James West:    Hmm. So –

Bruce Linton:  So, not a bad scenario.

James West:    You’re always going to have a big balance sheet of cash.

Bruce Linton:  We’re very good at spending money, right? Like, we have spent the most money of anybody in the sector.

James West:    I guess you have. You’ve raised the most.

Bruce Linton:  And we’ve built the most.

James West:    And you’ve built the most.

Bruce Linton:  And now we have the most – so now you got to hear, now you got 11 other places in total.

James West:    Sure, and there’s more coming every day.

Bruce Linton:  Sure. So I think, like, what we’re really talking about, starting on Tuesday, I believe there’s a two year race. And the two year race is to establish yourself with all of the elements I’ve just described, to such a meaningful level that it’ll be very important that people continue to pursue the market so they can identify who comes second. But if you do the race starting now, I think we have a very good chance of making it clear who’s number one in all these geographies, all the IP claims, all the packaging, everything you want. And if this causes everybody in pharma and packaged liquor to say oh, good God, I’d better do something fast – I think that actually increases our lead.

How could that be? Well, let’s see: you get a gorilla to dance with a mouse, and they’re not even dancing to the same music. How does that turn out? It’s going to be a disaster. So the reason we work well with them is, we incrementally built trust, competency, we became comfortable in how we interacted, we established where the entrepreneurial linkages were in terms of how we made decisions, and now we can accelerate.

James West:    How did you meet Constellation in the first place?

Bruce Linton:  Well, I think like a lot of connections these days, it starts with online stalking.

James West:    Okay, so you were stalking them or they were stalking you?

Bruce Linton:  We were stalking them.

James West:    Really?  Interesting.

Bruce Linton:  Yeah. And we were because, in about November of 2016, Rob Sands, who’s the CEO, had made a comment which may or may not have been properly captured, but that he thought he should be in the cannabis space, which was an unusual position for anybody not in the cannabis space, especially if they were in the alcohol beverage space. And so we were extraordinarily curious, why did he make that comment? And was he open in looking at this?

We began using LinkedIn as a way to reach into his organization – little shout out there for LinkedIn – and it established a connection, discussions, it went on for 11 months. And so on the occasion of October 17th when we made that announcement, it shocked the hell out of the world. Nobody knew we were doing it. And guess what? On Tuesday, same thing. Which means, in a sector where I can tell if you’ve had lunch probably based on rumours, there were no rumours on those two occasions of somewhere approaching $5.5 billion of investment. So I think that’s pretty good.

James West:    Sure, that’s pretty amazing. Bruce, I’ve had a few people ask me, and I thought, I’m pretty sure Bruce will have no problem with this, so I’m just going to throw it out there. But they’re like, so I always say that Bruce came from humble beginnings and, you know, was not born with a silver spoon in his mouth. In fact, and we tell the story that, you know, Bruce used to pitch people on Bay Street, and people find that like, wow, Bruce was one of us formerly? So give me the best example of your humble origins in the capital markets.

Bruce Linton:  Well, maybe you should make sure I qualify this – I meet many people who are greedy, and greedy people have a problem in that they believe their IQ increases as they become more wealthy, which validates being greedy, because now they’re so smart. They’re smarter than everybody else, and they should have more.

James West:    Bad thinking.

Bruce Linton:  I think greed and work ethic don’t coexist. And so maybe one of the things I’m habitualized to – there’s an interesting word for our sector – is you just work. Like, today I did a presentation at a marijuana conference, and the presentation and discussion was one hour. I spent one hour and forty minutes answering people’s questions afterwards. But I think you should. And yesterday I had a fairly long day in New York, and when I got to Toronto I had committed two months ago to attend a broker’s house for a client’s reception, because that broker, three and four years ago, actually supported us. And so I made sure I curtailed my interviews on time to get a flight so I could go to his house and thank his clients for supporting us four years ago.

James West:    Bruce Linton is a man of the people.

Bruce Linton:  No but I think it’s very important, right? If you say, well, I don’t need that person anymore, that doesn’t matter to me, it’s no longer a relevant – I think that’s where you start falling apart. And so I don’t think it’s a good habit to get into those patterns where you disregard the people who helped you get where you are, and so I’ve enjoyed the announcement. I enjoyed the negotiations way more than the announcement.

James West:    Sure.

Bruce Linton:  Like, it takes a lot of time to tire out some Goldman Sachs people. Like, we had, last weekend apparently it was sunny out, but we started around 8:30 in the morning, got done around 11:30 at night. And we thought we’d just get together for a bit more on Sunday, and then went from about 9:00 in the morning till 10:00 at night, and that was after we’d been working on it most days of the week – and I like that. I probably look tired. My mom texted me yesterday to say “you look tired on TV” and I said “that’s because I am tired on TV”.

James West:    Actually, I’ve sat across from you a million times and you do come across as a little bit worn right now.

Bruce Linton:  Well, I haven’t had a haircut in a while, I haven’t had a proper sleep. I actually – so we finished the deal while I was in New York. I flew down to New York because I had to be on the right side of the border in case this got done, but it wasn’t done. So then we were on the phone, we were doing stuff and working on stuff, and getting fairness opinions and all that stuff, and finally the deal was done around 12:30 and then it’s a good time to actually turn your attention to the press release, which you’ve worked through and you’re fine with. But then you have to think about the call in the morning and the quarter. So you know, you go to sleep for your hour, and you wake up, and you go, okay, that was quite refreshing, and then you do yesterday and last night. So I do apologize to your viewers if I look a little tired.

James West:    No, no-

Bruce Linton:  Because you know what? I’m also a little disheveled. Like, the hair thing, I don’t have that much hair.

James West:    You’re in the cannabis business.

Bruce Linton:  I do not have that much hair, but there’s no excuse for being unkept.

James West:    You got to do something for your $5 billion.

Bruce Linton:  I’m still wearing my high –

James West:    I see that.

Bruce Linton:  Yeah, no, you gotta keep those on.

James West:    Sure, okay. So let’s cut straight to October 17th. $5 billion, put that aside; that gives you such a momentum that you’re now – the next biggest company is standing in the shadow looking up and saying, how do we get back there?

Bruce Linton:  But they shouldn’t do that.

James West:    Well, they can’t help it. It’s human nature.

Bruce Linton:  No, no, no, no. but you have to figure out, right, like, it’s the best thing for the sector, fully and completely, is that we dominate and win. There will still be tons for everybody to do. But if you at least have a clear leader that has made good decisions, represents the sector well, doesn’t get in trouble by doing funny little side corporations that go into the US, or doesn’t get in trouble because, you know, the things that people do, it is very good for the sector. Because we’re not competing with each other; what we’re trying to do is transform society. And the more somebody grabs at my ankles, all they do is piss me off and try to slow me down, but it doesn’t actually achieve the mission which creates the business, which is where all the value is.

James West:    Right.

Bruce Linton:  So, October: to interject there, you were talking about October. October is going to be madness, and I don’t care, you know, somebody said to me that today, they said, “you know what it’s going to be like in October in Ontario?” I said, “What?” They said “World’s best concert coming for one night only and you’re trying to buy tickets online.” You’re going to be going like this, there’s going to be people, it’s going to crash the system because there’s going to be so many people want to do it. And a lot of people didn’t think through, like, that’s going to be interesting, in its very discreet way. Like, everybody knows how to do that right now for medical, and by the time the stores are ready is when the really splashy products hit.

James West:    Right.

Bruce Linton:  Which means the first time you go in the store, all the good stuff is there, whether it’s beverages, ingestibles, all the stuff that’s coming next with vapes. So I would sooner have them come to stores in Ontario that we own, train, stock up, and the first experience is quite a comprehensive offering. And so I don’t, if you want to buy the stock today and sell it tomorrow, probably crappy. If you actually want to make money over some duration, it’s a pretty good thing.

James West:    Well, I consider Canopy, personally I consider it a legacy stock – not one you’re ever going to sell, it’s one you’re going to pass on to your progeny.

Bruce Linton:  It’s kind of funny you’re talking about passing something around and we’re talking about a cannabis stock.

James West:    The one thing I’ve noticed about cannabis conversations is, the analogies actually exceed the real essence of the meeting. So it’s fantastic. So on October 17th, how many retail locations will you have in Canada?

Bruce Linton:  You know, they’re still coming out of Alberta, but we have, I may misrepresent it, so please give the future-looking statement – I think we’re at six, could be eight in Newfoundland including one at the point of production, which the point of production won’t be ready on the 17th because we’re building the building now that’s going to be our grow down there.

James West:    Right.

Bruce Linton:  We have six or eight in Alberta, same in Manitoba, and we’ve got the chunk through Alberta. So we got Saskatchewan, Manitoba and Newfoundland, Alberta coming up. Then we’re hoping and expecting that the approach taken by those three provinces will be what Ontario takes, and I suspect Ontario would find a heavy that 250 would be the minimum, and I bet they don’t need 550 right away. But that’s almost ten times more than the province is going to have. And so, you know, when you say, well, how do you use money? Well, building out a decent store so it’s got all the security controls, and has all the, you know, you want to make it look nice, you’re not going to spend less than, depending on the province, between $250 and $300 a square foot to build those.

James West:    Right.

Bruce Linton:  And so then the question isn’t how many stores, how many square feet are you filling out? And suppose each store is anywhere between 1,500 and 3,000 square feet, you can start to say, shit! If people own a lot of stores, they got to spend a lot of money, but you will make quite good money on them, too.

James West:    Right. So have you got a actual sort of enterprise within your enterprise that’s out there identifying locations, picking stores, dealing with landlords?

Bruce Linton:  Yeah, yeah. So we’ve kind of had that thing going on for a while, because all the construction and the leasing, and we have professional agents. So as an example, what that yields is, we ended up with these stores in Newfoundland, but our flagship store is on Water Street. And it’s not just on Water Street; it’s right across the road from this big, gray stone building that used to be the court house for Newfoundland. So I think it’s pretty cool, on the day prohibition ends, at the earliest hour it can end in Canada because of the time difference, the first place I want to be spotted buying cannabis is directly across from the courthouse.

James West:    Just for irony’s sake.

Bruce Linton:  Right. But so I think when you – it’s very important that you don’t just find locations, you find locations that are ‘the’ locations, and I think we’ve done a pretty good job of that.

James West:    Interesting. Yeah, I saw one of your locations, I was on Davie Street in Vancouver a month ago, I guess, and I was like oh, there’s the now very recognizable high sitting right there over some windows. Yeah, so it was like, oh, that’s great. It’s becoming so recognizable. There’s a place down here on Queen Street in Toronto coming together –

Bruce Linton:  Yeah, so Queen and Peter. We got that place a year ago to be our office.

James West:    That’s a hell of a location.

Bruce Linton:  Yeah, first floor, and the first floor, we thought, we can teach people how to do stuff in here, if we can’t sell stuff. We’ll have swag. But who knows – it’s a pretty good location.

James West:    Yeah, no kidding.

Bruce Linton:  Queen and Peter, I think neighbours sell like really high-end sports shoes and stuff like that. So it’s one of the spots.

James West:    And it’s one of the most iconic neighbourhoods in Toronto.

Bruce Linton:  Yeah, so we got that going.

James West:    Anyways, Bruce, it’s amazing to follow your progress. Your leadership in the industry is something that makes us all proud, I can say I speak for most everybody. And so –

Bruce Linton:  I did get a couple of texts from folks in the sector, two of them, to say thanks for doing this and re-rating it. But that’s two of them that recognize this was a pretty good thing for everybody. The only people who really hated the transactions were the guys that were short, a bunch of the people who didn’t get the money.

James West:    Right. [laughter]

Bruce Linton:  A couple were calling, like, I love you’re up, but Jesus, they didn’t have to go up! And I think I was fairly clear: I am not buying any of them. So there’s no sense in selling me and buying them and waiting for a premium on a takeout, because that’s not going to happen.

James West:    Right. An associate of mine bought, I think he got it at $29 in the pre-market and sold it at $37 that day, just for an in-day trade, causing celebration. He’s buying lunch next week.

Bruce Linton:  I would say if he could just do that every day, his compounded rate of return would be quite acceptable.

James West:    Yeah, actually, he’d be able to write $5 billion cheques! Anyways, let’s leave it there. Thank you so much for your participation. We’ll come back to you soon.

Bruce Linton:  Thanks, James.

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James West

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James West founded Midas Letter in 2008 and has since been covering the best of Canadian and US small cap companies. He covers global economics, monetary policy, geopolitical evolution, political corruption, commodities, cannabis and cryptocurrencies. As an active market participant, James is not a journalist and is invariably discussing markets...
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