RIV Capital Inc (RIV)

[Wo]

Canopy Rivers: This Canopy-Affiliated Stock Is On Sale After 30% Drop

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Cornerstone Investments
Oct. 17, 2018 2:47 PM•cgc
Summary

Canopy Rivers went public on September 20 and the stock has lost almost 30% of its value after the first trading day.

Canopy Growth owns 23% of the economics and all of the multiple voting shares, giving it majority vote and control of Canopy Rivers.

Both companies will benefit by having a dedicated public investment vehicle that improves specialization, access to capital, and valuation.

Canopy Rivers (OTCPK:CNPOF) went public on September 20, 2018, and enjoyed one of the most impressive IPO debuts, with the stock up 150% on the first day of trading. Despite the Canopy Growth (CGC) affiliation and close relationship between both companies, we think Canopy Rivers stands to become a unique player in the cannabis industry. We think Canopy Rivers will leverage its close relationship with CGC to invest across the cannabis industry and potentially capture the next billion-dollar opportunity.



(All amounts in C$ unless otherwise noted)

What Does It Mean for Canopy Growth?

Canopy Growth ("CGC") has become the most dominant name in the cannabis sector and we believe there are several strategic merits to having a separately-traded investment arm compared to having it all done in-house.



First of all, we all know that Aurora (OTCQX:ACBFF) is famous for its prolific investments across the various cannabis verticals. Aurora's investments have generally paid off handsomely due to the early timing of those deals. Canopy Rivers came along later, but it could really help CGC focus on its core business of dominating the cannabis business while having a dedicated management and investment team to focus on procuring and managing the most promising cannabis investments across the globe. Bruce Linton, the CEO of Canopy Growth, will be able to have a separate management team to rely on and become more efficient at both jobs at both companies. Investors can also benefit from more visibility into Canopy Rivers compared to the various investments embedded within Aurora.

Secondly, CGC could also benefit from having a formalized relationship with its portfolio companies. Canopy Rivers will serve as the conduit between its portfolio companies and CGC which in turn helps facilitate the exchange of knowledge, best practices, technology, and management expertise in this ecosystem. Compared to an in-house system where things could get murky and less organized, there are benefits of having a dedicated team. Things are more clearly laid out in this case and transparency is improved, which has been one of the criticisms of Aurora's approach.

Lastly, CGC benefits from having better access to capital from the public markets. Canopy Rivers relied on funding from CGC and private placements in the past to fund its acquisitions, but going forward, we expect the company to be able to raise capital more efficiently and pursue bigger investments. Canopy Rivers will also be better positioned to pursue value realization activities such as IPO or asset sales in the future.

Canopy Rivers Overview

We first mentioned Canopy Rivers in our Weekly Cannabis Report in which we expressed our excitement for the IPO and highlighted some of our concerns. We were worried that investors had become accustomed to the crazy runs we have seen in the recent cannabis IPOs. Investors might automatically expect that Canopy Rivers will also replicate these successful post-IPO performances and they might blindly pile into the stock without proper diligence.

To understand the Canopy Rivers story, it is important to examine the strategy of this company which is distinctly different from the traditional licensed producers. The company defines its strategy as the following:

The Company looks to invest in all segments of the cannabis value chain and aims to partner with best-in-class management teams that bring track records of success. Investments take the form of production-linked royalties, secured debt, newly formed joint ventures, and a variety of equity and equity-linked instruments. These unique structures position Canopy Rivers with preferred economics that ascribe value to both financial and strategic considerations.

The key takeaway here is that Canopy Rivers is not a traditional licensed producer that will handle cannabis production and processing, instead, it acts more like a venture capital firm for weed companies. Also, unlike the U.S. spin-off from Aurora Cannabis called Australis Capital (OTCPK:AUSCF) which has no operating assets and is essentially a shell company at this point, Canopy Rivers already has a portfolio of 11 investments ranging from licensed producers, distributors, to media companies. We will discuss some of the more representative investments and you can find the whole list on the website.

TerrAscend

Image result for terrascend cannabis logo

TerrAscend is a licensed producer located in Ontario with an indoor cultivation facility operated under its subsidiary, Solace Health. In November 2017, TerrAscend completed a round of private placement equity financing totaling $52 million. CGC, Canopy Rivers, and JW Management collectively acquired 47.7 million shares at $1.10 per share. They also acquired the same number of warrants with an exercise price of $1.10. Each of CGC and Canopy Rivers owns 11.3 million shares of TerrAscend which puts their respective ownership interest in the stock to $92 million before warrants and $171 million including warrants. Clearly, this investment has been hugely successful for Canopy Rivers based on the share price performances of TerrAscend so far.

We are the only author that has covered this stock on SA so far and we have expressed our cautious view on the stock back in May through our work, "A Head-Scratching Cannabis Stock". Part of our concern was the lack of scale and strategic direction at TerrAscend, and the company has been very quiet on its investor communications front. Our hypothesis is that the stock is only traded by a small number of investors and insiders which resulted in an inflated market capitalization that does not reflect the true value of this company as a whole. If you look at the daily trading volumes of this stock, which are mostly between 20k and 100k shares, you will realize that the stock is illiquid and could potentially be a result of a lack of investor awareness.