Once-mighty Canopy Growth loses billions as -2-

The genesis of the 2018 investment by Constellation Brands came after an effort by Linton to draw in capital to fuel growth through a strategic partnership. He approached several liquor giants and pharmaceutical companies but was turned down. Then he saw a 2016 interview with Constellation's then-CEO Robert Sands about the potential of cannabis.

"Why wouldn't big business, so to speak, be acutely interested in a category of that magnitude?" Sands said in the November 2016 interview with Ad Age. "If there's a lot of money involved, it's not going to be left to small mom-and-pops."

After an initial $190 million investment in 2017, Constellation Brands paid $4 billion to raise its stake in Canopy Growth to 39% in 2018. The deal included warrants that effectively gave Constellation control of Canopy Growth.

Although the $4 billion investment generated enthusiasm and higher stock prices around the sector, friction soon arose between Constellation Brands and Linton.

By the middle of 2019, Linton was ousted as co-CEO of the company he had founded. Some on Wall Street cheered the move after the company's track record of losses.

"While we commend Linton for his vision in establishing the world's leading cannabis company, we believe new leadership will be a welcome change," Cowen analyst Vivien Azer said in a research note at the time.

A few months later, Canopy Growth named David Klein as CEO. Klein is a 15-year veteran of Constellation Brands and spent time as its chief financial officer.

The way Linton sees it, when he left, the company was the leader by market cap, with $4 billion in the bank, low debt and a 26% market share, and it was selling more cannabis than it is today. The stock price was about $56 a share, compared with less than 60 cents a share now.

Canopy Growth's pivot to its asset-light model of cost savings and laying people off will probably not work, he said.

"The market has grown by more than three times [since 2019] and they're down every quarter in sales," he said. "You can't cut fast enough to keep up with that kind of deceleration in selling."

Overall, Linton said Constellation has not been able to translate its past success in beer and liquor into the Canadian cannabis market.

"In Canada, you can't market cannabis in the same way as beer," he said. "You can have very strong earned media, which amounts to social-media postings about the brand or press coverage of a brand, or a mention of a brand from a celebrity, but you cannot purchase advertising to promote cannabis."

Linton also criticized Canopy Growth's plan to focus on the U.S. market with the creation of Canopy USA.

If a company wants to raise more capital, it's not helpful to have uncertainty around a stock-market listing on the Nasdaq, he said. Canopy Growth's declining revenues in Canada and its stock price of under $1 will also make it hard to raise capital by issuing stock or by other means, he said.

Another once-mighty Canadian company, BlackBerry Ltd. (BB.T), is still operating partly because it issued stock when the company shares were trading at much higher levels and then held onto its cash for a rainy day -- a path that Canopy Growth should have pursued, Linton said.

Sources familiar with Canopy Growth, however, said that the company was disorganized under Linton and that the former executive has not had any internal knowledge of the business in four years. 

Linton was building up production in Canada, Africa, Latin America and Asia Pacific that was much greater than needed, the source said, and incoming CEO Klein had to move quickly to scale back and reduce cash burn.

Meanwhile, the Canadian cannabis market grinds on with efforts to address some of the challenges in its regulatory structure.

EY partner El-Cheikh said Canada's flat excise tax remains problematic because it contributes to making legal products more expensive than illegal cannabis products. There are other issues to resolve as well, along with marketing and promotion restrictions such as potency limits.

This year the Canadian government launched the Cannabis Strategy Table in an effort to review the industry challenges and suggest changes. EY produced a report on the Canadian market summarizing the areas of strength and the areas for development since legalization.

"The blame for the challenges in the Canadian cannabis industry cannot be just attributed to the government. All industry stakeholders have to work together to find a sustainable solution," El-Cheikh said. "The expectation is that we'll see policy changes in the future."

Hawkins from Entourage Effect Capital said Canada will end up being a "decent" cannabis market but will be smaller than most of the larger U.S. states that have already legalized cannabis, such as California.

This is Hawkins's advice for cannabis companies: "No. 1, don't count on the U.S. moving quickly on this, and secondly, know your market before you start building things out."

Smiths Falls residents were not surprised when Canopy Growth moved to shut down operations at 1 Hershey Drive, because it had already been whittling down its workforce there for some time, said town official Crowder.

Canopy Growth is leaving behind a 700,000-square-foot state-of-the art industrial facility and has been approached by interested parties as the town seeks out other businesses to help diversify the local economy, Crowder said.

"We want a sustainable business. This could be one or multiple purchasers or tenants," Crowder said. "There's a limited supply of large industrial space in Ontario currently. We're in a good position."

-Steve Gelsi

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07-17-23 0952ET

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