Shares soar 13% as CFO of Canopy’s biggest shareholder takes the helm

Canopy Growth Corp. said Monday it has named David Klein, currently chief financial officer at its biggest shareholder, Constellation Brands Inc., as its new chief executive, taking over from Mark Zekulin on January 14.

The news sent the U.S.-listed shares up about 13%.

Zekulin became the sole CEO of the largest cannabis company by market capitalization after the Constellation Brands-dominated board of directors fired former co-CEO Bruce Linton in July. Zekulin and Linton previously told MarketWatch that tensions in the boardroom had been rising in the months after Constellation STZ, -1.30% took control of the Canopy CGC, -0.42% WEED, +13.96%  board as part of a $4 billion investment.

Prior to Linton’s dismissal, Zekulin -—a one-time political operative—- held the title of co-CEO and was largely responsible for the company’s day-to-day operations, while Linton operated as a public-facing spokesman and liaison to the capital markets. When the board ousted Linton, Zekulin agreed to remain as the sole CEO until a replacement was found, presiding over two-plus quarters of lackluster earnings amid broad problems for Canadian weed companies.

Zekulin previously told MarketWatch that there was a short list of replacement CEO candidates and that he and the board aimed to find an appropriate choice by the end of the year.

Klein has been at Corona beer brewer Constellation for 14 years. In his current role as CFO and executive vice president, he has overseen the company’s finance operations, M&A activity and IT. He has sat on the Canopy board for the past year and is currently its chair. The company is planning to appoint a new chair once Klein takes up his new role.

Jefferie’s analyst Owen Bennett said the news was mixed.

“Positive views (are) likely to be taken around implications for greater financial focus and commitment from Constellation Brands, though also negatives around potential lack of external appetite for the role, and the likelihood of a heavy focus on an unproven beverage category,” he wrote in a note to clients. “Expect financials to continue to underwhelm as domestic Canada struggles continue.”

Bennett rates Canopy stock as underperform.

Alliance Global Partners analyst Aaron Grey said the move signals that Constellation is taking greater control over Canopy and its investment.

“While we believe the move makes sense operationally given other management hires from STZ including Canopy’s CFO and CAO, we had thought the company may have looked for an outside hire,” he wrote in a note to clients.

As far as strategy goes, Grey is not expecting much to change with the next six months to be dominated by the next phase of Canadian legalization, so-called Cannabis 2.0, the launch of derivatives, including edibles and beverages.

“The bigger question in our opinion continues to be if and when we will see the rollout of more stores in the provinces of Quebec and Ontario,” said the note. “We continue to see the continued delay of store rollouts of having an outsized impact on Canopy given the company’s high inventory levels and rough 6 million sq ft of cultivation space.

“That said, given David’s background as CFO of STZ, we expect the company to have an increased focus on profitability, while still focused on overall growth as the company aims to become a leading global cannabis CPG company.”

Alliance Global rates Canopy stock as neutral.

The Canadian cannabis sector has suffered a prolonged stock slump in the past few months, as the rollout of legal cannabis has advanced far more slowly than expected. Companies have been hurt by a shortage of retail outlets as licensing is hampered by regulations that have allowed the black market to thrive. As a result, revenue has not lived up to expectations and most companies continue to post heavy losses.

Canopy has been gearing up for the launch of Cannabis 2.0 in Canada, the name given to the launch of cannabis derivatives such as edibles and beverages that is set to start in early 2020. Prior to November, only flower and oil were legal in Canada.

The company’s portfolio of products for Cannabis 2.0 will include chocolates, vape cartridges and pens and distilled cannabis drinks.

Canopy is developing a line of Tweed-branded drinks with 2 mg of THC per can, as well as Houseplant Grapefruit and Houseplant Lemon drinks that are part of a partnership with actor Seth Rogen and screenwriter and producer Evan Goldberg. Those drinks will contain 2.5 mg of THC per 355 mL can.

The company is also planning seltzer-like sparkling water products under the new brand Quatreau, that will contain 20 mg of CBD or 2 mg CBD and 2 mg THC per can. For consumers looking for a more potent drink, the company is developing a brand of mixers that will be packaged in 150 mln bottles using its propriety clear liquid cannabis.