Constellation Brands, the international beverage juggernaut that invested $3.8-billion in Canopy Growth last year, announced today that it’s modifying more than 100 million warrants held in the Canadian cannabis producer.
First, the news: Canopy Growth announced April 18 that it had bought the rights to acquire Acreage Holdings, a U.S. cannabis company with a 20-state footprint. The $3.4-billion purchase price begins with a $300-million cash payment to secure that acquisition—contingent upon the potential U.S. federal legalization of cannabis. "Today we announce a complex transaction with a simple objective. Our right to acquire Acreage secures our entrance strategy into the United States as soon as a federally-permissible pathway exists," said Canopy Chairman and Co-CEO Bruce Linton.
Second, what is a warrant? According to divestopedia.com, a warrant "is a security that gives an option to the holder to purchase a certain number of shares at a predetermined price." The use of warrants is an interesting development in major cannabis M&A transactions that lean heavily on future political or legal maneuvers. In the case of Constellation Brands (and Altria’s $1.8-billion investment in Cronos Group last year), the warrants are held with the intent to exercise a broader purchase in the event that, say, the U.S. legalizes cannabis.
Coincident with the Acreage news was a press release detailing Constellation Brands’ plan to modify warrants held in Canopy Growth. Its $3.8-billion investment in Canopy last year included 139.7 million warrants.
In its April 18 press release, Constellation’s management team, as shareholders in Canopy, waived its right to veto the Acreage acquisition. More significantly, the team extended its right to exercise those warrants. Originally, Constellation had a three-year window to move on those warrants and purchase shares that would take its ownership stake in Canopy past 50 percent.
Now, Constellation is giving itself five to eight years to exercise those warrants—a more comfortable financial position in the face of uncertain political winds in Washington, D.C.
With a major deal now on the table (and directly contingent on federal legalization in the U.S.), Constellation Brands has revisited its investment in Canopy Growth and allowed additional breathing room while the North American cannabis industry gets into shape.