Since the beginning of the year, Canopy Growth (NASDAQ:CGC) shares dropped 28.05% to $6.85 per share.
In December, the Ontario-based cannabis giant divested its CBD subsidiary assets in Germany as part of its rationalization strategy. The company began 2022 with the issuance of its Environmental, Social and Governance (ESG) report for calendar year 2020, describing the Canopy's commitment to sustainability practices.
It continued with two recent product launches - Martha Stewart CBD Wellness Topicals in collaboration with Martha Stewart and enhancement of the Tweed brand.
The company’s potential was recognized some five years ago by a leading alcohol company, Constellation Brands, Inc. (NYSE:STZ), who then bought a 9.9% stake in Canopy. Since then Constellation Brands increased its stake several times to reach 38.6%.
The Analyst
Cantor Fitzgeralds’ Pablo Zuanic maintained a ‘Neutral’ rating on Canopy’s stock, lowering the price target to CA$9.60 ($7.51) from CA$16.30.
The Thesis
The analyst reduced the price target to address sectoral derating and lowered estimates.
If Constellation Brands plans to exercise its 140 million outstanding Canopy warrants set to mature in Nov. 2023 and Nov. 2026 it would eventually need to disburse more than $6 billion. This move would lead to doubling its stake in the company to 282 million shares of a total share count post-conversion of 533 million, comprising a stake of around 53%, Zuanic wrote in his Thursday analysis.
Considering that the stock value has fallen below $7, Constellation Brands has the opportunity to acquire all outstanding Canopy shares it does not own for just above $2 billion.
This looks like an attractive investment opportunity, considering that Constellation Brands management was optimistic on the cannabis industry outlook in their latest presentation from Jan. 6, 2022, Zuanic noted.
He further proposed several possible moves for Constellation Brands: “a) stay put (do nothing), b) let the warrants expire unexercised if the share price does not recover, c) exercise the warrants when they expire if the share price goes up (although how would they explain around $4 billion “value destruction” of waiting to buy something for $6 billion [for a 53% stake] that they could have bought for $2 billion [for a 100% stake]?), d) buy what they do not own for around $2 billion now, e) sell their stake (for a big a loss?), or f) have Canopy Growth merge with someone (but would they want to relinquish control?). Constellation Brands controls five of the seven seats on the Canopy Board.”
Zuanic projects that Canopy’s December quarter results would be disappointing, but adds it is possible that Constellation Brands will choose to buy what they don’t have now for around $2 billion.
Price Action
Canopy shares traded 0.88% lower at $6.79 per share during Friday’s pre-market session.
Photo: Courtesy of Esteban Lopez on Unsplash
