Canopy Growth Corp (TSE:CGC) (OTCMKTS:TWMJF) (FRA:11L1) CEO Bruce Linton outlines his plans to use the recently announced “bought deal” private placement to continue to drive Canopy’s leadership position in the global marijuana industry.

Listen to the podcast interview with Bruce Linton: https://www.midasletter.com/wp-content/uploads/2016/12/Bruce-Linton-Canopy-Growth-161207-podcast.mp3

Transcript:

James West: Okay, so let’s talk a bit about your bought deal financing, $60 million, what are you going to use that for?

Bruce Linton: Yeah. So the concept we have is that we made an acquisition in Germany, Quebec and Ontario. And each of these locations has the opportunity to now, once acquired, grow organically, meaning increase what they are from the point of acquisition. So that means in Quebec, building a facility; it means with the ones in Ontario, expanding facilities. It means in Germany being prepared to create what’s necessary to enter the market on that property.

So 60 mil seemed about the right number so that you can commence all that, and then in Canada, once we spend it all, there’s some possibility that the Tier Two banks will then lend back to us, but it’s not a generally available instrument to say ‘lend me the money so I can build it’. The best you can hope for is, ‘I’ve built it, will you give me some of the money back in the form of a mortgage’.

James West: Interesting. So, in the same press release, you announced that you had engaged Cowen and Company LLC as financial advisor in the United States. Are we to read into that that you might be on a shopping trip in the United States?

Bruce Linton: No. So we aren’t. It is illegal to participate in touching the cannabis crops in America, at a Federal level. The reason that matters is, public companies who want to provide audited financial statements to their investors have a problem when you enter America, in my opinion and that of Deloitte, which is, if I were doing anything else that was federally illegal – moving around materials that the government didn’t agree with it would be pretty hard to have an auditor give you a clean audit on that.

So if we do any acquisitions in America, it won’t be related to production or illegal activities. That doesn’t mean there aren’t a number of products that have been evolved in that market that may not be a fit, but specifically nothing which is currently involved in production, distribution or touching Canada’s plan.

James West: Okay. So is there any insight you can shed as to why you’ve retained Cowen?

Bruce Linton: I think Cowen, if you look back at the history of Cowen, they’ve had a primary position in the activities of GW in terms of their listing in the US. They seem to have been the first US investment bank of any size which has put an analyst dedicated to the topic. They’ve initiated tours that brought parties to Canada, and they’re now creating a plan to institutionally introduce cannabis to America. So it seems to me that they have occupied the leadership position in America as far as analysts and investment bankers based at a real bank, and so whatever they do, we’d like to work with them.

James West: Sure. So with Jeff Sessions nominated as Attorney General for Donald Trump’s cabinet, and his stance against medical marijuana and the legalization of marijuana generally well known, how do you see that impacting your opportunity as Canada’s premier medical marijuana provider, and potentially Canada’s premier recreational marijuana provider?

Bruce Linton: So for all the years since we started, I’ve been very clear we only participate in markets which are legally available at each and every level of government, so America has never been on our radar. But I think substantial American investors have found Canada, and Canopy, as a place to invest, and I suspect the clarity of that individual will make it ever more certain that they should keep looking north of the border to deploy their capital. They should then see how Canada rolls out and whether or not it introduces medical or works in the medical implementation in Brazil or the EU. It doesn’t mean that there aren’t roots for capital or opportunities to expand, it just means that America is going to be even more uncertain as to what’s going on. But that’s never been a market for us, and won’t be until the Feds say you can come in, please do so.

James West: Actually what I was getting at, Bruce, was, with America potentially regressing a bit in their progress towards legalization of marijuana for medical purposes and recreational purposes at the Federal level, does that give you a better position to compete globally in the case of Germany being a case in point?

Bruce Linton: Yeah, no, I don’t think that there are any – it definitely does not hurt our ability to advance. I would say it does make a much more clear path for the capital, and I think it just makes a chance for Canada to really stand out on our policy. There was a prior Trudeau who took a different stance on things about Cuba, and maybe this one’s different stance is related to cannabis.

James West: Mm-hmm. So now what do you make of all of the money flowing into all of the other LPs in Canada? I mean, the number of bought deals in the last 10 days alone are over $200 million, and some have suggested externally that there is a mania and a bubble underway. I don’t particularly agree with it, but what’s your opinion of that?

Bruce Linton: I think everybody should be thoughtful when they’re looking at where they put their capital, because often you want to consider, am I paying for what exists or am I paying to create it? I’d leave that perspective about that. But I think that most sources of capital see what’s happening here is it’s almost like, you know, you can have a technology acceleration period which may have started in Silicon Valley, but really, the only place that there’s a real market with real opportunities to invest is in Canada, and the parties who have come to see what we’re doing from around the world, it just gets more and more. It’s unbelievable to me how interested such huge pools of capital are from around the world.

James West: Yeah. So now let’s talk a bit about your recent acquisitions, Mettrum and Vert.

Bruce Linton: And Germany, don’t forget. Come on to Germany, James.

James West: We’ll get there. I’m trying, Bruce, it’s moving a little quick! So now with these purchases in Canada, some might say that you are defending market share and creating barriers to competition, while others might say that you’re merely acquiring distribution and a clientele. Which is it? Is it both, or is it one or the other, more so?

Bruce Linton: I think it’s more like, when we look at things that we might want to acquire or not, we look at, what do they have as far as a current footprint, how well that can footprint expand. Because I think whatever everybody’s got going now, at best, it’s a third of what we need to have by the end of 2017. So this is not about the stretching exercise that we currently call the market; it’s about being orderly and prepared, so that as the market actually becomes some meaningful sum, you know, 100,000 patients moving in means we’ve done a good job of educating doctors, but it hasn’t really moved the needle yet on the number of people who want access.

So this is about a platform that can actually make a big difference, because it is substantial. And oddly, I’ve had a number of discussions with people who are sort of rebellious proponents of the old way, and I think in a weird way, we get along after a while because if we don’t succeed in creating a big platform, we can’t educate 10,000 doctors a year on why this is a reasonable thing. We can’t push on getting a GST exemption on taxation. We can’t necessarily, without some substantial size, really move oils production through drug identification number procedures so that people can start to expect the provincial programs to pay for it.

So buying all these companies gives us a breadth of scope that makes all those programs possible.

James West: Okay, let’s move to Germany now. What changed in Germany that has suddenly enabled you to go in there and sort of set up shop through an acquisition before domestic German production got ahead of steam? How did that happen?

Bruce Linton: Well, so the German government has had a program and they signaled, I think it was in May or so, that they intended to consider this as a product which would become part of the medical operations in the country. And they don’t have domestic production, so they let us as Canopy be the first company outside of Europe to send the product to them legally, and only one others had done so.

So when you do that, you have a partner on the other side of the ocean who gets the permit from the government to receive the import, and we worked really well with these guys over the first year and a half, so it made sense to bring everything together so that we could think about next steps and have people in the country as well as people here. So that was sort of what drove it, and now, whatever’s up for Europe, I feel like we at least have a PhD or neurologist and a strong business professional on a small team that all know how to kind of work through getting licenses.

James West: Can you distribute your product throughout Europe because of your footprint in Germany, or is that something you’ve got to still do country by country?

Bruce Linton: So far, it’s country by country, and I think it will continue to be, because it is governed in a bit of a tricky way, even it’s EU, it’s still a narcotic and a number of other considerations, and I think a lot of the countries each want to have their own controlled production, and whether or not it’s permissible. So it’s kind of a nice start to make sure that we don’t miss anything over there.

James West: Yeah, you bet. Okay, Bruce, let’s leave it there. Very insightful as usual. Thank you so much for your time today.

Bruce Linton: Hey, thanks for reaching me.