Canopy Growth’s cash position grows via Constellation cash, note sale

By Devika Patel

Knoxville, Tenn., Feb. 15 – Canopy Growth Corp. had cash and cash equivalents of C$4,915,000,000 as of Dec. 31, 2018, largely due to the C$5 billion investment in Canopy Growth by Constellation Brands, Inc., a Victor, N.Y.-based producer, importer and distributor of beer, wine and liquor.

Constellation bought 104.5 million Canopy shares at C$48.60 per share and 139.7 million three-year warrants in August.

The cash position was also enhanced by a June sale of convertibles.

“[Cash and cash equivalents were also influenced by] June’s issuance of convertible notes with an aggregate principal of $600 million,” senior vice president and chief financial officer Tim Saunders said on the company’s third quarter ended Dec. 31, 2018 earnings conference call on Friday.

The Constellation investment constituted a fundamental change under the company’s convertibles, but no holders elected to put or convert the notes.

“The fundamental change notice issued in September on the convertible notes expired in early December without any holders exchanging the shares so that the make-whole provision expired and the notes remain outstanding at Dec. 31, 2018,” Saunders said.

The company used cash to acquire assets in the third quarter.

“With a strong cash position, we added strategic assets and IP through acquisitions,” chairman and co-chief executive officer Bruce Linton said in a press release.

“Sales from the first wave of products and retail environments launched in the third quarter demonstrate that we are capturing consumers' attention,” Linton stated.

Adjusted EBITDA in the third quarter was negative C$75.1 million.

Canopy priced an upsized C$500 million of five-year convertible notes before the market open on June 15 at the rich end of talk with a coupon of 4.25% and an initial conversion premium of 25%.

On June 22, the company said the underwriters had exercised the C$100 million over-allotment option in full, raising the size of the deal to C$600 million.

Proceeds from the greenshoe, like those from the original amount, will be used to support expansion initiatives and for general corporate purposes.

Price talk had been for a coupon of 4.25% to 4.75% and an initial conversion premium of 20% to 25%.

Cowen and Co. LLC and BMO Nesbitt Burns Inc. were bookrunners for the Rule 144A and Regulation S deal.

The initial size of the deal had been C$400 million with a greenshoe of C$60 million.

As previously reported, C$200 million of the deal was sold to Greenstar Canada Investment LP, an affiliate of Constellation Brands, Inc.

The remainder of the offering was “widely allocated to institutions, primarily in the United States, Europe, as well as Canada,” the company stated.

On Dec. 6, 2018, Canopy Growth said no holders had exercised the put option under its C$600 million 4.25% convertible senior notes due 2023.

Also, no notes were converted during the make-whole fundamental change period or the conversion period.

As announced Nov. 2, the company was tendering for the 4.25% convertibles after a fundamental change occurred under the note terms.

CBG Holdings LLC, an affiliate of Constellation Brands, Inc., became the beneficial owner of about 56% of the voting control over the company's common shares on Nov. 1.

As a result of the fundamental change, the notes were also convertible and putable.

The fundamental change repurchase price was par of C$1,000 plus accrued interest to but excluding the fundamental change repurchase date of Dec. 5.

Holders could exercise their fundamental change repurchase option until 5 p.m. ET on Dec. 4.

The notes were also convertible until 5 p.m. ET on Dec. 5.

Because the deal with CBG also constitutes a make-whole fundamental change under the note terms, the conversion rate was increased until 5 p.m. ET on Dec. 4 by 2.9846 additional common shares.

The initial conversion rate is 20.7577 common shares per C$1,000 principal amount of notes and the additional shares brought the make-whole conversion rate to 23.7423 common shares per C$1,000 of notes.

Canopy Growth is a Smiths Falls, Ont.-based medical and recreational marijuana company.

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