Logo Courtesy: TerrAscend
In November of 2017, Canopy Growth invested over $50 million into TerrAscend, then a small but growing startup. At the time, the entire cannabis landscape looked green and wide open with opportunity. Cannabis companies were flush and investors scrambled to get in on the ground floor of a burgeoning new industry.
Fast forward three years and the terrain is, well, different. Regulations slowed the pace of growth more than predicted. At the same time, projections were rosier than reality. And scaling state-to-state (or province-to-province) was harder than anticipated. Many investors, rightly, felt burned, and now companies are the ones frenzied to raise money to keep current operations afloat.Which is why the news today that Canopy provided an additional $80.5 million to TerrAscend is all the more striking. Surely, TerrAscend has made some smart moves. Early on, the company adopted an aggressive M&A strategy, acquiring well-respected brands in the space, including medical-brand Ilera in Pennsylvania, and the well-known Victorian-designed Apothecarium retail chain.
Recently, TerrAscend also announced expansion plans in New Jersey and Utah. On the news of the loan, the markets reacted positively. Clarus Securities, Jefferies and Stifel all issued positive guidance. Jefferies, writing on Canopy (WEED CN), called the loan “a shrewd move in the current environment.” Commenting on TerrAscend (TER), Clarus said they believe it “bodes well for TerrAscend shareholders going forward,” while Stifel said the loan “significantly boosts liquidity under favourable terms” for TerrAscend.While the funds from Canopy cannot be used, directly (or indirectly) in connection with cannabis or cannabis-related operations in the U.S. until the plant is fully legalized on the federal level, it does deepen Canopy’s relationship with TerrAscend, a company pursuing business in Canada, the U.S. and Europe. Jeffries made much of the fact that Canopy’s loan reaffirms their commitment to international expansion and that they aren’t just making “token international investments to boost their valuations.” Instead, they point out that Canopy can “benefit from the near term international expansion of the cannabis market without having the huge cost structure burden of doing it themselves.”
If – and when – legalization occurs in the U.S., TerrAscend could be Canopy’s best bet. Stifel said it “reinforces TER as amongst Canopy’s best options to gain US exposure in the future,” while Clarus was more direct: “TerrAscend appears to be the second potential horse (along with Acreage Holdings) for Canopy’s U.S. cannabis expansion once cannabis is federally legalized.”The banks also noted that this is the first – and perhaps largest – strategic investment by Canopy since parent Constellation Brands installed David Klein as CEO in December. In their briefing, Clarus wrote, “Canopy and Constellation appear to have redoubled their support for TerrAscend.”
The positive street reaction comes during a week the stock market is being rocked by the global coronavirus pandemic. TerrAscend’s stock (TER) was trading down, despite the positive news.