Canopy Growth Corp. is cutting ties with its venture capital arm, Canopy Rivers Inc., as the investment company continues to struggle with a number of poorly performing assets and massive losses on a greenhouse project in Leamington, Ont.
Canopy Growth launched Canopy Rivers in 2017 as a partly owned subsidiary that could focus on making minority investments across the marijuana industry. Canopy Growth, then in peak acquisition mode, would buy controlling positions in other companies while Rivers, which trades separately on the TSX under the symbol RIV, would focus on smaller strategic investments.
The partnership is now being wound down, the companies announced on Monday. Canopy Growth is buying out Rivers’ ownership stake in two jointly owned companies, cancelling a royalty agreement with Rivers and retiring its 27-per-cent ownership stake and 84-per-cent voting stake in Rivers. Canopy Growth’s nominees to Rivers’ board of directors, including Canopy Growth chief financial officer Mike Lee, will resign, and Canopy Rivers will change its name.
The multifaceted deal will see Canopy Growth pay $115-million in cash and transfer 3.75 million of its shares to Rivers. In return, Canopy Growth will increase its stake in a Quebec greenhouse complex called Vert Mirabel and raise its “conditional” ownership stake in TerrAscend Corp., a cannabis company in which Rivers had been a significant investor. (The TerrAscend securities are “exchangeable shares” that convert into common shares if cannabis is legalized in the United States at the federal level).
“Canopy Rivers was established in 2017 as a strategic investment vehicle for Canopy Growth, helping us pursue key business opportunities including development of the Vert Mirabel greenhouse, which today is a very important component of our Canadian cannabis operations,” Canopy Growth chief executive David Klein said in a news release. “With our new strategy in place, it is appropriate for us to divest our interest in Canopy Rivers to increase our focus as a company.”
The industry outlook has changed dramatically over the three years since Rivers was launched. Canadian legal marijuana growers have shifted from rapid expansion to retrenchment, mothballing greenhouses to deal with a supply glut and selling off international assets that have floundered. Canopy Growth has been one of the biggest downsizers, shuttering growing facilities across the country and laying of hundreds of employees.
Rivers’ business model was designed around taking positions in companies that could fit into Canopy Growth’s broader network through supply contracts and royalty agreements. A change in cannabis market dynamics, however, left Rivers invested in several increasingly redundant projects.
The biggest lemon is PharmHouse Inc., a joint venture between Rivers, which owns 49 per cent, and a group of greenhouse entrepreneurs from Leamington, Ont.
The 1.3-million-square-foot facility was licensed for cannabis production in 2019, but quickly ran into a cash crunch when Canopy Growth and TerrAscend decided not to buy cannabis from the facility at a prenegotiated price, pursuant to a supply agreement. PharmHouse was unable to pay its loans and entered creditor protection in September.
In Rivers’ most recent financial filings, the company recorded a $32-million loss on its equity investment in PharmHouse and another $45-million loss on loans to the joint venture that it does not believe will be repaid.
Rivers is also the guarantor of a $90-million loan that Bank of Montreal made to PharmHouse. Rivers recorded a $25-million loss related to the loan because it expects to get less from the sale of PharmHouse assets than what the BMO loan is worth.
Other companies in the Rivers portfolio have struggled as well, with Rivers recording losses on several loans, debentures and royalty agreements. In April, James E. Wagner Cultivation Corp., one such portfolio company, entered creditor protection and was sold.
In its fiscal second-quarter ended Sept. 30, Rivers reported a net loss of $110.4-million, compared with a net loss of $4.4-million in the same quarter last year. This was mainly because of losses related to the PharmHouse venture.
Canopy Rivers struck an upbeat tone in its statement about the Canopy Growth divestment on Monday, saying that it was leaving the partnership in a strong cash position and gaining more flexibility to potentially enter the U.S. market. Rivers’ stock price jumped 30.4 per cent on Monday to close at $1.20. The company’s share price is still more than 80 per cent below 2018 highs.
“This is a transformative transaction for our Company that we believe provides substantial value to our shareholders through an enhanced cash position and strategic flexibility, and the collapse of our dual class share structure,” Narbe Alexandrian, CEO of Canopy Rivers, said in a statement.
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Mark Rendell