The Bank of Montreal entered into a major financing deal with licensed Canadian cannabis company Canopy Growth, marking a significant policy shift for major banks in the country.
Canopy Growth, which is based in Smith Falls, Ont. and is considered one of Canada’s largest licensed cannabis producers, announced its $175-million bought deal with GMP Securities LP and BMO Capital Markets. BMO is owned by Bank of Montreal.
In its announcement, Canopy stated that BMO and GMP led underwriting of the stock sale involving a little over five million shares of the public traded medical cannabis company. This marks the very first time that a major bank-owned brokerage in Canada has participated in and headed an equity financing for a cannabis producer.
The news means that the biggest banks in the country could be warming up to the weed sector. Until now, major Canadian banks – most especially the “Big Five” lenders – have been very reluctant to provide financial services to cannabis companies. Because of this, the rapidly growing cannabis industry is left with no other choice but to rely on smaller financial institutions to cater to its commercial banking and financing needs.
What is the deal about in the first place?
For this round of equity financing, Canopy stocks were priced at $34.69, which is 8 percent below their closing share price on Wednesday last week. Canopy’s stock price slightly surged as news of the BMO deal spread.
A company that is looking to raise capital would frequently issue new shares and sell them. And in the burgeoning cannabis industry that still struggles to break even, it is vital for cannabis companies to need huge cash injections.
The advantage of having a big lending institution such as BMO underwrite the stock sale to raise capital is that a company gets easier access to more institutional investors. This, in turn, gives it the ability to negotiate a better stock price.
Out of regulatory concerns in United States, however, major banks are reluctant to underwrite stocks of cannabis companies, especially ones that are exposed to the U.S. market. The U.S. federal government still classifies cannabis as an illegal substance, even if there are already states that have legalized medical cannabis, or both medical and recreational cannabis. The absence of big lending institutions in the cannabis industry has meant that companies often raise capital through high net investors, family offices, credit unions, and venture capital funds.
Canopy said in a press release that its deal with the underwriters also includes an over-allotment option, which allows the purchase of up to 759,000 additional shares at $34.60 per share, totaling more than $26 million. According to the company, they expect the deal to close on Feb. 7, subject to certain conditions. The company also added that the net proceeds of the sale is going to be used on capital expenditures for working capital, capacity expansion, and general corporate requirements.
What about the other big Canadian banks?
The question on everyone’s mind upon hearing this news is whether other “Big Five” banks are warming up to cannabis companies and whether they would follow in BMO’s footsteps. The answer can only be: it remains to be seen.
Royal Bank of Canada said in a statement last week that, currently, it does not provide banking services to cannabis companies. However, it recognizes that the legislative landscape for the cannabis industry is evolving, and assures that they are reviewing their policies.
Bank of Nova Scotia, meanwhile, stated that while they understand the robust cannabis-related debate in Canada and abroad, their priority is to effectively manage the business risks for their stakeholders and customers to make sure that they are protected.
Canadian Imperial Bank of Commerce, on the other hand, said in a statement that they are currently assessing the situation.
Toronto-Dominion Bank declined to comment on cannabis deals.