Canopy Growth arranges US$750-million loan, fuelling speculation of an acquisition

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Canopy Growth Corp . is borrowing US$750-million from private equity group King Street Capital Management LP, in a move that has left analysts speculating that the company could be priming itself to make a significant acquisition.

The Smiths Falls, Ont.-based company announced on Thursday that it had entered into a credit agreement with the New York private equity firm at an interest rate of 9.5 per cent, which will also see the company having access to an additional loan of US$500-million. The loans have no interim payments and will mature on March 18, 2026.

This is the largest financing sought by Canopy since it received a $5-billion investment from American alcohol behemoth Constellation Brands in the fall of 2018. In less than three years, however, the company had burned through more than 75 per cent of that money, leaving it with approximately $825-million in cash as of the end of December, 2020.

Canopy’s stock declined slightly on news of the borrowing to the $42 mark.

“Given Canopy’s resources, the financing brings more questions than answers,” wrote Andrew Carter, an analyst at Stifel Financial Corp. He noted that just weeks earlier, the company had issued a US$2-billion shelf offering for a term of 25 months, meaning that it had just over two years to raise up to US$2-billion by selling shares on the public market.

“This total firepower could suggest the company is preparing to do something transformative. … We are left to question if the company is considering an acquisition outside cannabis, meaningfully diversifying the business away from the company’s current operations,” Mr. Carter wrote in a Friday morning note.

Canopy spent most of 2020 dramatically trimming costs, after years of unbridled spending and accelerated international expansion under the tenure of former chief executive officer and co-founder Bruce Linton. The company exited its operations in South Africa and Lesotho, ceased hemp farming in Springfield, N.Y., and closed down seven production facilities across the country, including its two flagship facilities in Aldergrove and Delta, B.C.

But recent moves to build up its cash holdings once again might be a signal that the company is on the cusp of a renewed growth spurt, said one analyst who declined to be named because he was not authorized to speak publicly. The analyst also speculated that Canopy could be preparing to make a significant acquisition, especially given the recent legalization of cannabis in Mexico, and legislative victories in the U.S. that could pave the way for federal legalization.

In a statement to The Globe and Mail, Canopy’s executive vice-president and chief financial officer Mike Lee said that the financing would enable Canopy to “take advantage of potential opportunities in our core markets.” The statement did not directly address whether or not the company intends to embark on an acquisition spree. But company filings indicated that Canopy could use proceeds of the loan for “working capital, and general corporate purposes, including acquisitions.”

Mr. Carter also noted that it would be difficult for Canopy to achieve positive operating cash flow by the end of 2023 “without a meaningful acquisition.” Indeed, Canopy has had a history of negative cash flow, and part of its recent US$2-billion shelf offering, according to company filings, was to ensure that it could mostly remain in positive cash flow territory.

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