Canopy Growth Corporation today announced changes in some areas of global operations to ‘drive strategic focus’.
That sounds very positive. But underneath that euphemism is a company currently in a strategic review, undertaken barely 15 months into legalization.
They’re not alone either, with others in the sector entering CCAA proceedings, initiating ‘strategic reviews’, evaluating ‘strategic’ options, or as Canopy is doing, ‘driving strategic focus’. Indeed, the reader would be well advised to pay attention anytime an outfit puts out press releases with the word ‘strategic’ in it.
More than two years ago, I wrote about a deal Canopy made to purchase a 90k sqft grow-op in Yorkton, Saskatchewan. The company they were looking at was an early stage applicant under Health Canada, and at the time, was called ‘rTrees’. In June of 2017, the deal closed, a bunch of shares went into escrow for milestones, and Canopy changed the name of the company to ‘Tweed Grasslands’. And it’s now history.
I just had a look at $CGC’s financials since December 2017, and curiously, ‘Grasslands’ has not been mentioned since Q1 F2018. Even then, it was only a single line item in their MD&A, and not included in the core statements.
The deal? For $31MM, Canopy bought ‘rTrees’. In exchange, they got $30MM in Goodwill/Intangibles, $300k in land, a shack…….and……that was about it. rTrees got their ACMPR license in January of 2018, all milestone/contingent shares and payments were subsequently released, and the deal was final. I can’t identify how much the capital was subsequently put into the facility, but assume it was up and producing at one point. Which would mean a whack more has been spent.
Now, it’s being shuttered. All 90k of indoor grow space, 40 jobs, and whatever else was there. Grasslands has already been scrubbed from the Canopy website. Andrew MacCorquodale, the gent who sold rTrees to $CGC, went on to immediately become a director of Tweed Grasslands at $CGC, and in little more than a year and a half, became the “Chief Growth Officer, Global Hemp and Outdoor” there. Heck of a rise for a guy who describes himself as “an accomplished entrepreneur since incorporating his first business in 1996 at the age of 12.” He’s neglected to mention farming anywhere in his CV, which only lists building computers and web hosting as primary work experience.
So molly, why would you get wound up about $30MM spent on nothing? The rollout hasn’t been smooth as you know (who could have?), $CGC’s got billions, they’ve got the firm hand of Constellation on the tiller, and besides, to this outfit….it’s a rounding error.
Because: I’ve been running their deals since I began looking at cannabis companies in late 2016. And rTrees is a poster child of what Bruce Linton was doing for more than 2 years. Proving out the first Law of Capital: It’s easy to spend money when it’s not yours. The level of optionality and contingencies layered into many of the deals were all finance porn – nesting sophisticated optionality within them. The valuations of which have yet to be crystallized, while many of the underlying assets have have borne little fruit over that time.
$CGC’s announcement signals to myself is that it is working through a complete front-to-back evaluation of the entire company. From the high level impairments of the last financials, to the additional $700-800MM in write-downs coming in these, I expect the next round will be focused upon (and in great detail) around operations and core process. Some echos and presages from changes made so far are now coming out, as ‘Big Daddy’ $STZ comes in to clean up the playroom. I have to say, labelling Tweed Grasslands as ‘Global Operations’ is pretty cute.
We’ll likely have to wait and see until the quarter after next where $STZ is going, but I think they’re going everywhere and anywhere within the shop that Bruce built. I doubt there will be any stone left unturned down to specific roles and responsibilities.
And as we’ve seen from the dealmaking to initial formation, there will be much, much more change to come. I also have little doubt that it’ll be done first and foremost with $STZ’s shareholders in mind.
The preceding is the opinion of the author, and is in no way intended to be a recommendation to buy or sell any security or derivative. The author holds no position in $STZ or $CGC.