- Canopy Growth announced a complex deal to take ownership of lucrative US cannabis operations.
- Nasdaq has objected to some specifics of the deal, which could put Canopy’s listing at risk.
- It’s another consequence of the quasi-legality of the cannabis industry in the US.
It’s down over 66% this year, as the company has lost market share in Canada’s competitive cannabis market.
CEO David Klein has an apparent ace up his sleeve: options to acquire lucrative US cannabis businesses, including the cultivator Acreage Holdings, the edibles manufacturer Wana Brands, and the vaporizer company Jetty Extracts.
But Canopy had long said it could close those deals only once the cannabis business became federally permissible in the US. That’s left investors stuck in limbo.
This week, though, Canopy decided to forge ahead anyway.
‘On the fast track’
On Tuesday, the company said it would combine Acreage, Wana Brands, and Jetty into a new entity called Canopy USA using a complicated structure to own but not control the US unit. The company said it planned to report the financial results of this US business as part of its own results once the acquisitions closed, which could take some time.
“At some point, we’ll have regulatory improvements even if it’s not federal permissibility in the US,” Klein told Insider in an interview. “We want to be on the fast track to realizing those benefits.”
Canopy’s US-listed stock jumped 27% Tuesday after the deal was announced.
But there’s no guarantee that Canopy’s creative deal will pass muster.
“Upon Canopy’s announcement yesterday, and following company comments, many might have assumed the new structure has the informal blessing of the exchanges. In last night’s proxy, however, it appears this is not the case, with NASDAQ actually opposing the structure,” analysts from the investment bank Jefferies said in a note Wednesday evening.
Canopy said in a Tuesday filing that the Nasdaq stock exchange objected to the company’s plan to report the results of the US unit as part of the parent company. That could jeopardize its Nasdaq listing.
“Nasdaq has proposed that such consolidation is impermissible under Nasdaq’s general policies,” Canopy said in a filing.
Right now, companies that sell or cultivate cannabis containing THC in the US are barred from listing on major stock exchanges like the Nasdaq.
Canopy said it’s in discussions with Nasdaq about the matter, and Klein said in an interview that the Canopy USA deal was similar to the company’s arrangement with another US cannabis company, TerrAscend, which he said had been vetted by Nasdaq and by Canada’s TSX exchange.
“We continue to have open conversations with the exchanges,” Klein said. “They’re aware of our structures. They’ve seen this all ahead of time, prior to our announcement.
“It’s an evolving regulatory environment, but we’ll continue to work with both exchanges to make sure that we comply with regulations because it’s important for us to remain listed.”
John McKenzie, the CEO of TMX Group, the parent company of the TSX exchange, said in an interview with BNN that Canopy’s plan complies with the exchange’s regulations. He added that Canopy’s deal could provide a model for other Canadian cannabis companies that want to do business in the US.
In a note on Thursday, Jefferies analysts said McKenzie’s comments could potentially help “trigger more M&A for US assets,” and provide a potential pathway for US cannabis firms to list on the TSX, which could improve their access to investors.
Canopy’s bid to win over Nasdaq could have huge implications for US cannabis
The success or failure of Canopy’s efforts to win over Nasdaq could have big implications for the rest of the US cannabis industry.
When the deal was announced, some analysts, lawyers, and other industry experts said it could pave the way for other cannabis companies that operate in the US to list on marquee exchanges, which would make it easier for them to raise capital.
Jefferies said Nasdaq’s objection to Canopy’s plan was a key risk and that the rest of the cannabis industry should pay close attention.
“What is very clear now though, is that developments here now become an absolute critical watch-out, not only for Canopy,” the Jefferies analysts said in a note.
Analysts from Stifel downgraded Canopy’s stock to a sell rating Wednesday and said some of the nuances of the deal may allow Constellation Brands, the Corona beer maker that backs Canopy, to wiggle out of its partnership.
Constellation Brands invested $4 billion in Canopy Growth in 2018.
If a US cannabis-reform bill that would let cannabis companies access banks passes during the upcoming lame-duck congressional session, it’s possible that Canopy’s issues with Nasdaq will become moot, experts told Insider, though it’s an open question as to how the exchanges will view the protections the bill, known as the SAFE Banking Act, would provide.
Marc Hauser, a former lawyer and the founder of Hauser Advisory, an advisory firm focused on the cannabis industry, said Canopy’s deal on first read looked like a “novel and clever approach to threading a very narrow needle.” It’s a strategy he expects won’t work for anyone else, at least without any regulatory changes, he said.
“I’m assuming it’ll be deeply scrutinized,” he said.