Is Cannabis the New SaaS? Part Two
Canopy Rivers is a Jason Wild SPAC without the dilutive SPAC economics.
Last August, I wrote a post speculating cannabis stocks could become the new hot sector like Software as a Service (SaaS) stocks (Is Cannabis the New SaaS?). With some cannabis companies reporting gross margins approaching 70%, it was very clear just how profitable cannabis could be.
I specifically highlighted how AYR Strategies (Canada: AYR, OTC: AYRWF) was undervalued. Since that post, AYR is up over 100%.
As a value investor and a contrarian at heart, I’m amused and confused by how many of my colleagues in the investment business seem to shrug off the cannabis opportunity. I see opportunity left and right. Today, I want to share another stock idea that I believe is an interesting low risk way to invest in cannabis. Let’s talk about Canopy Rivers (Toronto: RIV, OTC: CNPOF).
Canopy Rivers is the publicly traded company that is controlled by Canadian cannabis giant, Canopy Growth (Canada: WEED, NYSE: CGC). It was set up to be the venture arm of Canopy Growth. Frankly, it was always a weird structure, but I believe it was set up to help fund as many investments as possible that Canopy could control without dragging down Canopy’s results.
All of that is history as Canopy Rivers is now unwinding all of this in a big transaction that separates the company from the parent, Canopy Growth (Canopy Rivers Announcement).
As part of the transaction, Canopy Growth will pay $115 million in cash and 3.75 million shares in Canopy Growth to Canopy Rivers, and further Canopy Growth will cancel the shares it owns in Canopy Rivers in exchange for the stake in Terrascend and a few other assets.
Canopy will also retain its stakes in approximately a dozen companies of which it invested approximately $50 million of capital.
One note of caution, Canopy Rivers invested and lent money to a troubled Canadian cannabis company called Pharmhouse. Even worse, it guaranteed its debt. Pharmhouse is currently in bankruptcy and soliciting bids for its remaining business and assets. Canopy has already written down its investments and taken a reserve for its guarantee.
When all is said is done, here is my analysis of what Canopy Rivers will have in assets when the transaction is completed in mid-February. Note, the ending cash balance all depends on how much Canopy Rivers will be out due to its Pharmhouse guarantee.
The summary is that at a minimum, even if the venture portfolio is a zero, and they take a giant C$50 million hit from Pharmhouse, Canopy Rivers will have C$226 million in cash and stock, or C$1.57 per share (with Canopy Growth at C$40 per share).
After cash and stock, we are left with the remaining venture portfolio which Canopy Rivers has invested approximately C$50 million at cost. At cost value, this portfolio adds another C$0.35 per share. If the portfolio is worth twice, it would add C$0.70 of value.
So, Canopy Rivers could be worth something from C$1.57 per share to as much as C$2.53 per share in liquidation value. I want to caution every reader to do your own analysis. This is only my rough estimate and there are a lot of moving pieces, and I may have made a mistake.
When this transaction is completed in mid-February (that is the current estimate), Canopy Rivers will rename itself and go hunting for an acquisition in the U.S. But here is the best part: Jason Wild and his JW Asset Management owns 23.9% of the Canopy Rivers and will become the largest shareholder. I wrote an appreciation post of Jason and his incredible record of 25% average annual returns for twenty years here: Wild That So Few Are Following Jason Wild.
I believe Canopy Rivers is a Jason Wild SPAC without the dilutive SPAC economics. We get a sponsor who has a terrific track record, focused on the U.S., and a stock that probably trades at a discount to its net asset value. At a time when SPACs with great sponsors trade at a premium, this is strange. But with so few investors still investing in the sector, this is not too surprising.
After missing Terrascend (My big miss of 2020), I love the idea of investing alongside Jason Wild at a discount and getting a free look at a U.S. cannabis acquisition. Value investing in cannabis is alive and well.
P.S. Tomorrow, I’m going to interview Jason Wild. I’m looking forward to discussing Canopy Rivers with him as well other cannabis stocks. I hope to have this interview up later this week or next week in a future post. If there is anything you would like for me to ask him, please comment below.