This week could be a momentous one on Wall Street, as investors look for some clarity on what the Federal Reserve's plans for interest rates are for the rest of 2023 and beyond. Few expect an immediate increase in short-term rates, but market participants want to see whether Fed officials expect rates to move lower in 2024 or stay at currently high levels. Uncertainty on that score sent futures markets slightly lower in premarket trading Monday morning.
The volatility in interest rates has highlighted the need for companies to be smart about their capital structures to ensure that they can raise cash when they need it. Unfortunately, timing matters, and investors don't seem too pleased Monday morning at the latest moves from Canopy Growth (CGC 2.41%) and Madison Square Garden Entertainment (MSGE -0.18%) involving stock offerings. Here's what's going on with the two companies.
Canopy gets some cash
Canopy Growth saw its shares drop 9% in premarket trading on Monday. The cannabis company has recently seen its stock triple from its summer lows, and that led Canopy to capitalize on an unexpected opportunity to raise some capital.
Canopy announced Monday morning that it had entered into subscription agreements with a group of institutional investors in a private placement offering. Under the terms of the agreements, investors will pay about $25 million to purchase roughly 22.93 million units at $1.09 per unit. The institutional investors will also have the option to acquire up to the same number of units at the same price between now and Nov. 2, meaning that Canopy could raise as much as $50 million in the private placement.
With the stock having closed at $1.35 per share on Friday, the private placement seems to give the participating institutions a nice discount. But the other thing to note is that the "units" offered include not only a share of Canopy stock, but also a warrant to purchase an additional Canopy share at a price of $1.35 anytime in the next five years. The result is that if Canopy's stock continues to rise from here, those warrants will become valuable, and when the institutions exercise the warrants, current shareholders will have their interest in the cannabis company diluted.
Canopy shares jumped last week on news it would shut down its dietary supplement business to focus more on its core cannabis operations. That's not a guarantee of success, but Canopy did see the move in the share price as a vote of confidence in its longer-term future.
MSG sees some selling
Meanwhile, shares of Madison Square Garden Entertainment were down more than 6% in Monday's premarket session. The company behind the iconic New York City venue has an institutional shareholder doing a secondary stock offering, but it also expects to offset a portion of those sales with repurchases of its own.
Madison Square Garden Entertainment said that Sphere Entertainment Group had filed to sell 7.15 million shares of stock, valued at about $234 million based on Friday's closing price. The move will completely divest Sphere of any holdings in MSG Entertainment.
Meanwhile, MSG Entertainment will repurchase $50 million in shares from the underwriters, using its current buyback authorization. To do so, the company will use its revolving credit facility, which it has amended to provide up to $150 million in available liquidity.
Sphere has made sales like this periodically during 2023, and because the same executive leads both Sphere and MSG Entertainment, many investors see the offering as a nonevent. Nevertheless, the complete disentangling of Sphere and MSG from a stock ownership perspective could possibly presage further actions of a more substantial nature in the near future. That possibility might be what shareholders are concerned about Monday morning.