Constellation Brands Inc (STZ)

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Canopy Growth Corporation (CGC) just terminated Bruce Linton, a co-CEO and co-founder of the company. The departure is likely to be a net positive for the company for multiple reasons, including that it is maturing into a larger company that has a new set of operational concerns that require a different skills from its leadership.

One great example of this would be that Canopy already already raised sufficient cash for it to operate, and no longer needs to access capital, or to pursue a partner to assist in packaging and distribution logistics. Canopy currently has cash from Constellation Brands (STZ). Constellation owns about 38% of Canopy Growth, and controls four seats on its board of directors.

Last summer, at which point Constellation already invested in Canopy and established a strategic partnership, it acquired a sizable stake in Canopy, as well as "additional warrants of Canopy that, if exercised, would provide for at least an additional $4.5 billion CAD to Canopy Growth." The additional warrants would be enough to acquire a majority steak in Canopy.

As part of its investment, Constellation is receiving 139.7 million new warrants which are exercisable over the next 3 years. Of those, 88.5 million are exercisable at a price per share of C$50.40, a 43.0 percent premium to Canopy's VWAP, and 51.3 million are exercisable at the VWAP at the time of exercise. If Constellation were to exercise all existing and new warrants, its ownership would exceed 50 percent."

This current move to terminate Linton may have been partially due to issues with Canopy's performance, but this decision is far more likely a sign of its maturing and the inevitable power turnover. Moreover, this is a reasonably anticipated move considering the sizable stake Constellation took, which included a majority of board members and rights to acquire more equity. There was a certain tacit acquiescence of control along with Canopy’s taking so much of Constellation’s money, and giving them the right to acquire a majority stake through warrants by 2021.

Canopy’s press release for this termination did not refer to it as such, but rather merely noted Bruce Linton “will step down as co-CEO and Canopy Board member.” as part of a "leadership transition." Linton was subsequently quite clear that he was fired, but his CNBC interview on the subject appeared to indicate he understood the reasoning behind this inevitable departure from management.

Moreover, his attitude towards it jives with my belief that he is not the proper leader that Constellation wants for Canopy. Linton stated, “I really think at the end of the day, sometimes entrepreneurs are entrepreneurs because they’re not super employable,” adding "I probably don’t have a resume because I like creating businesses and driving them." In essence, Canopy no longer requires entrepreneurial leadership, as it matured to a significant entity that needs to focus on operational and regulations.

Canopy's press release on the leadership transition goes on to state:

Mark Zekulin has agreed to become the sole CEO of the company and will work with the Board to begin a search to identify a new leader to guide the company in its next phase of growth, which will include both internal and external candidates. Rade Kovacevic, a long-serving member of the team currently leading all Canadian operations and recreational strategy will assume the role of President. These changes are effective immediately." (Source: Canopy's 7/3/2019 press release)

This indicates Canopy will have "a new leader" and not Zekulin or co-CEOs going forward. Co-CEOs are atypical. Zekulin also commented that "I personally remain committed to a successful transition over the coming year as we begin a process to identify new leadership that will drive our collective vision forward." Zekulin has also subsequently commented that he will step down after they find a replacement.

Canopy already established itself as a major market competitor or leader in most of its markets, and has grown to a have operations in 12 countries and on five continents. Constellation's continued control and inevitable exercising of their warrants is becoming increasingly obvious. But this should also create greater operational certainty and consistency, which Constellation and most equity investors appreciate.

Running Canopy is sure to be a highly sought after position, and the true question becomes whether Constellation already has a person in mind. It is likely the next CEO will be there to transition to the company into Constellation, or to run the company with Constellation as a majority holder, which it will almost certainly become in 2021.

Constellation's operational excellence should help Canopy complete the transition from an emerging company to the large cap stock it now is. Moreover, a smooth transition of power ensures the probability of Constellation pouring billions more into Canopy, which should help it secure its leadership position.