Equity Method Investments |
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Feb. 28, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Equity Method Investments and Joint Ventures [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| EQUITY METHOD INVESTMENTS |
EQUITY METHOD INVESTMENTS:
Our equity method investments are as follows:
In November 2017, we acquired 18.9 million common shares, which represented a 9.9% ownership interest in Ontario, Canada-based Canopy Growth Corporation (the “November 2017 Canopy Investment”), a public company and leading provider of medicinal and recreational cannabis products (“Canopy”), plus warrants which give us the option to purchase an additional 18.9 million common shares of Canopy (the “November 2017 Canopy Warrants”) for C$245.0 million, or $191.3 million. The November 2017 Canopy Warrants were issued with an exercise price of C$12.98 per warrant share and are exercisable as of February 28, 2019. These warrants expire in May 2020.
The November 2017 Canopy Investment was accounted for at fair value from the date of investment through October 31, 2018. From November 1, 2018, the November 2017 Canopy Investment has been accounted for under the equity method (see “Canopy Equity Method Investment” below). The November 2017 Canopy Warrants have been accounted for at fair value from the date of investment.
On November 1, 2018, we increased our ownership interest in Canopy by acquiring an additional 104.5 million common shares (the “November 2018 Canopy Investment”) (see Canopy Equity Method Investment below), plus warrants which give us the option to purchase an additional 139.7 million common shares of Canopy (the “November 2018 Canopy Warrants”, and together with the November 2018 Canopy Investment, the “November 2018 Canopy Transaction”) for C$5,078.7 million, or $3,869.9 million. The allocation of the consideration paid as of the date of closing was determined using a relative fair value approach based upon a market value of C$5,060.9 million for the acquired common shares and a fair value of C$2,131.3 million for the acquired warrants using a Black-Scholes option-pricing model. The inputs used to estimate the fair value of the November 2018 Canopy Warrants as of November 1, 2018, are as follows:
Accordingly, C$3,573.7 million, or $2,723.1 million, was allocated to the November 2018 Canopy Investment, and C$1,505.0 million, or $1,146.8 million, was allocated to the November 2018 Canopy Warrants. In addition, we incurred $24.5 million of direct acquisition costs which were allocated to the acquired securities utilizing this relative fair value approach. This resulted in $17.2 million of direct acquisition costs being allocated to the November 2018 Canopy Investment and included in the value of the Canopy Equity Method Investment under the cost-accumulation model, and $7.3 million being allocated to the November 2018 Canopy Warrants and expensed to selling, general and administrative expenses.
The November 2018 Canopy Warrants consist of 88.5 million warrants (the “Tranche A Warrants”) and 51.2 million warrants (the “Tranche B Warrants”). The Tranche A Warrants are immediately exercisable at an exercise price of C$50.40 per warrant share. The Tranche B Warrants are exercisable upon the exercise, in full, of the Tranche A Warrants and at an exercise price based on the volume-weighted average of the closing market price of Canopy’s common shares on the TSX for the five trading days immediately preceding the exercise date. The November 2018 Canopy Warrants expire in November 2021 and are accounted for at fair value from the date of investment.
On November 1, 2018, our ownership interest in Canopy increased to 36.6% and, as this allows us to exercise significant influence over Canopy, we account for the November 2017 Canopy Investment and the November 2018 Canopy Investment, each of which represents an investment in common shares of Canopy, collectively, under the equity method (the “Canopy Equity Method Investment”). As of November 1, 2018, the Canopy Equity Method Investment balance consisted of the amount allocated to the November 2018 Canopy Investment of $2,740.3 million, plus the fair value of the November 2017 Canopy Investment at that date of $694.9 million. We recognize equity in earnings (losses) for this investment on a two-month lag. Accordingly, we recognized $2.6 million of equity in losses from Canopy’s results of operations for the period November 1, 2018, through December 31, 2018, and related activities, in our consolidated financial statements for the year ended February 28, 2019. As of February 28, 2019, the carrying amount of the Canopy Equity Method Investment is greater than our equity in the book value of net assets of Canopy by $1.4 billion. This difference primarily represents our basis in identifiable intangible assets and goodwill associated with the November 2018 investment. Equity in earnings (losses) from the Canopy Equity Method Investment and related activities include, among other items, the amortization of the fair value adjustments associated with the definite-lived intangible assets over their estimated useful lives, the flow through of inventory step up and unrealized gains associated with changes in our Canopy ownership percentage resulting from periodic equity issuances made by Canopy.
Canopy has various convertible equity securities outstanding, including equity awards granted to its employees and options and warrants issued to various third parties, including our November 2017 Canopy Warrants and November 2018 Canopy Warrants. As of February 28, 2019, the conversion of Canopy equity securities held by its employees and/or held by other third parties would not have a significant effect on our share of Canopy’s reported earnings or losses. Additionally, under an amended and restated investor rights agreement, we have the option to purchase additional common shares of Canopy at the then-current price of the underlying equity security to allow us to maintain our relative ownership interest. The exercise of our November 2017 Canopy Warrants as of February 28, 2019, also would not have a significant effect on our share of Canopy’s reported earnings or losses. However, as of February 28, 2019, the exercise of all of the November 2017 Canopy Warrants and the November 2018 Canopy Warrants held by us would result in an increase in our ownership interest in Canopy to greater than 50% and the consolidation of Canopy’s results of operations in our consolidated results of operations with the recognition of an associated noncontrolling ownership interest, as appropriate. This could have a significant effect on our share of Canopy’s reported earnings or losses. As of February 28, 2019, the exercise of all Canopy warrants held by us would have required a cash outflow of approximately $5.9 billion based on the terms of the November 2017 Canopy Warrants and the November 2018 Canopy Warrants. Additionally, as of February 28, 2019, the fair value of our equity method investment in Canopy was $5,842.9 million based on the closing price of the underlying equity security as of that date.
The following table presents summarized financial information for Canopy presented in accordance with U.S. GAAP. The amounts shown represent 100% of Canopy’s financial position as of December 31, 2018, and results of operations from the date of our investment on November 1, 2018, through December 31, 2018. We recognize our equity in earnings (losses) for Canopy on a two-month lag. Accordingly, we recognized our share of Canopy’s losses from November and December 2018, which was included in Canopy’s third quarter fiscal 2019 results, in our fourth quarter fiscal 2019 results.
Subsequent event –
In April 2019, we agreed to modify the terms of the November 2018 Canopy Warrants and certain other rights. Modification of the November 2018 Canopy Warrants is subject to, among other things, approval by Canopy’s shareholders. These changes are the result of Canopy’s intention to acquire Acreage Holdings, Inc. (“Acreage”) upon U.S. Federal cannabis legalization, subject to certain conditions. As a result of the proposed modifications, and following all necessary Canopy shareholder approvals, we will continue to have the option to purchase an additional 139.7 million common shares of Canopy upon exercise of the warrants originally received in November 2018; however, this option will consist of three tranches of warrants, including 88.5 million warrants (the “New Tranche A Warrants”), 38.4 million warrants (the “New Tranche B Warrants”) and 12.8 million warrants (the “New Tranche C Warrants”, and collectively with the New Tranche A Warrants and the New Tranche B Warrants, the “New November 2018 Canopy Warrants”). The New Tranche A Warrants will continue to have an exercise price of C$50.40 per warrant share and remain currently exercisable, but would expire November 1, 2023. The New Tranche B Warrants would have an exercise price of C$76.68 per warrant share and the New Tranche C Warrants would have an exercise price based on the volume-weighted average of the closing market price of Canopy’s common shares on the TSX for the five trading days immediately preceding the exercise date. The New Tranche B Warrants and the New Tranche C Warrants would have an expiration date of November 1, 2026. If Canopy exercises its proposed right to acquire the shares of Acreage and we were to exercise all of our outstanding November 2017 Canopy Warrants and the New November 2018 Canopy Warrants, our ownership interest in Canopy would no longer be expected to be greater than 50 percent.
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