Sell your Canopy Growth stock, PI Financial says

The new arrangement between Canadian cannabis producer Canopy Growth (Canopy Growth Stock Quote, Chart, News TSX:WEED) and US multi-state operator Acreage Holdings is kind of neither here nor there in its impact on Canopy’s fortunes.

That’s according to PI Financial analyst Jason Zandberg who reviewed the details in an update to clients on Thursday.

Smiths Falls, Ontario’s Canopy Growth and New York City’s Acreage Holdings on Thursday announced an agreement to amend the terms of their arrangement arrived at last April. That deal involved Canopy agreeing —if and when there was movement at the federal level on the legalization of cannabis in the US— to buy Acreage for US$3.4 billion, with the terms giving Acreage shareholders an immediate up-front payment of US$300 million and 0.5818 of a common share of WEED for each Acreage share. At the time, the deal represented a premium of 41.7 per cent over Acreage’s 30-day VWAP.

Under the new arrangement, Canopy is agreeing to pay ACRG shareholders and convertible debenture holders US$37.5 million along with the conversion of each ACRG subordinate voting share into 0.7 of a fixed share and 0.3 of a floating share of WEED stock. ACRG shareholders will be entitled to receive 0.3048 of a Canopy share for each fixed share held, while the fixed shares will continue to be traded on the CSE and will be subject to a WEED call option.

The new arrangement, which also features the stepping down of Acreage CEO Kevin Murphy, who will continue to serve as chairman of the board, was prompted by “broader market and economic factors,” according to the joint press release.

“The United States is going to be a core market for Canopy Growth and this New Agreement solidifies our path forward with Acreage. I am excited to bring our relationship with Acreage back to centre stage in our U.S. strategy and look forward to a time when the laws in the United States permit us to finalize this transaction as we march toward bringing our exciting beverage products to the US,” said Canopy CEO David Klein.

“This development is more positive for Acreage Holdings than Canopy Growth. The terms under the previous agreement interfered with Acreage’s ability to raise capital. That said, if Canopy wants a strong MSO to partner with after a US legalization event, it needed ACRG to continue to build its US cannabis platform,” Zandberg said.

With his update, Zandberg is maintaining his “Sell” recommendation on WEED along with maintaining his 12-month target of $20.00, which he bases on a 22x multiple of his fiscal 2022 Price-to-Sales estimate. As of publication date, the analyst’s target represented a projected return of negative 10.6 per cent.

Zandberg’s forecast has Canopy generating fiscal 2021 (year end March 31) EBITDA of negative $147.5 million on revenues of $465.1 million and fiscal 2022 EBITDA of negative $53.3 million on a top line of $753.4 million. (All figures in Cdn dollars except where noted otherwise.)

Year-to-date, Canopy’s share price is down 17 per cent.