Canopy Growth (CGC 3.67%) formed Canopy Rivers (CNPOF +0.00%) for the sole purpose of identifying and investing in cannabis companies that could wind up working with Canopy Growth someday. To deliver on that goal, Canopy Rivers announced plans on Feb. 4 to raise $85 million from investors, including $30 million from Canopy Growth.
What's the deal
Through CIBC Capital Markets and Eight Capital, Canopy Rivers is offering 11,500,000 subordinated voting shares to investors at a price of $4.80 per share. If the deal goes off as planned, it will raise $55 million for Canopy Rivers' coffers.
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At the same time, it's doing a $30 million private placement with Canopy Growth that will increase Canopy Growth's ownership of subordinate voting shares to 27.3% from 26% today. Together, Canopy Rivers expects the two deals to bring in $85 million, before fees.
Canopy Rivers is also offering investors an overallotment option totaling 1,725,000 shares that could raise an additional $8.3 million if it's fully exercised. Therefore, Canopy Rivers could wind up hauling in $93.3 million in gross proceeds when this deal closes on Feb. 27.
What it means
Canopy Rivers is unique in that it works collaboratively with Canopy Growth to identify companies that could help Canopy Growth deliver on its plans to be one of the world's biggest cannabis companies.
Canopy Growth already has over 30% market share in Canada's medical marijuana market, and its trailing-12-month sales of $73 million in U.S. dollars (at current exchange rates) makes it Canada's largest marijuana company by revenue. The company hasn't reported fourth-quarter sales yet, but revenue is expected to accelerate when it does because of the opening of Canada's adult-use recreational marijuana market last October.
Canadians spend about $6 billion Canadian annually on marijuana, including illicit sales, according to Statistics Canada, so there's a big opportunity ahead for Canopy Growth, Canopy Rivers, and other cannabis companies operating there.
The opportunity for these companies isn't limited to Canada, though. Over $150 billion is spent on marijuana worldwide, according to the United Nations, including $50 billion that's spent in the United States. Canopy Growth has shunned targeting business in the U.S. in the past because of rules prohibiting stocks listed on major stock exchanges from conducting activities that are illegal at the federal level. Even though 10 states have passed recreational use laws, marijuana remains a Schedule I controlled substance at the federal level.
However, after the federal government removed hemp, a strain of cannabis sativa, from the controlled-substances list in December, Canopy Growth announced plans in January to invest up to $150 million in New York to create a hemp industrial park.
Canopy Rivers hasn't said if it plans on using any of the money it's raising in this offering to target the U.S. more, but the timing of this deal suggests that could be the case. As Canopy Rivers has matured, it's expanded beyond providing capital in exchange for a piece of future revenue to convertible debt and equity-only deals. Its portfolio currently includes 11 companies, including TerrAscend, a Canadian marijuana company that announced it's acquiring Grander Distribution, a U.S. hemp product developer, manufacturer, and distributor that serves 10,000 retailers globally.
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Is Canopy Rivers a stock to buy?
Canopy Rivers had CA$105 million in cash on the books exiting September, so this offering significantly increases its financial flexibility. However, investors should consider that it reported operating net income of only CA$4.3 million in the six months ending Sept. 30.
Instead of investing in it because of expectations of revenue growth, it may be best to view Canopy Rivers as a venture-style fund that's likely to see its financials swing significantly because of changing valuations to its portfolio. Nevertheless, Canopy Rivers offers investors an interesting way to invest up and down the cannabis ecosystem, because in addition to investing in growers and cannabis consumer-goods companies, it's also invested in Headset, a cannabis analytics company, and Civilized, a cannabis media company.
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