Equity Method Investments |
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| Equity Method Investments and Joint Ventures [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| EQUITY METHOD INVESTMENTS | EQUITY METHOD INVESTMENTS Our equity method investments are as follows:
(1)The other equity method investments balance at November 30, 2020, and February 29, 2020, excludes investments reclassified to assets held for sale.
Canopy Equity Method Investment
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 gave us the option to purchase an additional 18.9 million common shares of Canopy (the “November 2017 Canopy Warrants”). 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. The November 2017 Canopy Warrants were accounted for at fair value from the date of investment through April 30, 2020. See “Canopy Equity Method Investment” below.
In November 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. On November 1, 2018, our ownership interest in Canopy increased to 36.6% which allowed us to exercise significant influence, but not control, over Canopy.
In May 2020, we exercised the November 2017 Canopy Warrants at an exercise price of C$12.98 per warrant share for C$245.0 million, or $173.9 million (the “May 2020 Canopy Investment”). The May 2020 Canopy Investment increased our ownership interest in Canopy to 38.6% upon exercise. We entered into foreign currency forward contracts to fix the U.S. dollar cost of the May 2020 Canopy Investment. For the nine months ended November 30, 2020, we recognized net losses on the foreign currency forward contracts of $7.5 million, in selling, general, and administrative expenses within our consolidated results of operations. The payment at maturity of the derivative instruments is reported as cash flows from investing activities in investments in equity method investees and securities for the nine months ended November 30, 2020.
We account for the November 2017 Canopy Investment, the November 2018 Canopy Investment, and the May 2020 Canopy Investment, each of which represents an investment in common shares of Canopy, collectively, under the equity method (the “Canopy Equity Method Investment”). Equity in earnings (losses) from the Canopy Equity Method Investment and related activities (see table below) include, among other items, restructuring and other strategic business development costs, 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, unrealized gains (losses) associated with changes in our Canopy ownership percentage resulting from periodic equity issuances made by Canopy, and our share of Canopy’s additional loss resulting from the June 2019 Warrant Modification (as defined below) of $409.0 million (the “June 2019 Warrant Modification Loss”).
Amounts included in our consolidated results of operations for each period are as follows:
In June 2019, the Canopy shareholders approved the modification of the terms of the November 2018 Canopy Warrants and certain other rights (the “June 2019 Warrant Modification”), and the other required approvals necessary for the modifications to be effective were granted. The November 2018 Canopy Warrants now consist of three tranches of warrants, including 88.5 million warrants expiring November 1, 2023 (the “Tranche A Warrants”) which are currently exercisable, 38.4 million warrants expiring November 1, 2026 (the “Tranche B Warrants”), and 12.8 million warrants expiring November 1, 2026 (the “Tranche C Warrants”, and collectively with the Tranche A Warrants and the Tranche B Warrants, the “November 2018 Canopy Warrants”). 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 (the “Acreage Transaction”). In connection with the Acreage Transaction, Canopy had a call option to acquire 100% of the shares of Acreage (the “Acreage Financial Instrument”).
The other rights obtained in June 2019 in connection with the Acreage Transaction include a share repurchase credit and the ability to purchase Canopy common shares on the open market or in private agreement transactions. If Canopy has not purchased the lesser of 27,378,866 Canopy common shares, or C$1,583.0 million
worth of Canopy common shares for cancellation between April 18, 2019 and two-years after the full exercise of the Tranche A Warrants, we will be credited an amount that will reduce the aggregate exercise price otherwise payable upon each exercise of the Tranche B Warrants and Tranche C Warrants. The credit will be an amount equal to the difference between C$1,583.0 million and the actual price paid by Canopy in purchasing its common shares for cancellation. If we choose to purchase Canopy common shares on the open market or in private agreement with existing holders, the number of Tranche B Warrants or Tranche C Warrants shall be decreased by one for each Canopy common share acquired, up to an aggregate maximum reduction of 20 million warrants. The likelihood of receiving the share repurchase credit if we were to fully exercise the Tranche A Warrants is remote, therefore, no fair value has been assigned.
In September 2020, the Acreage shareholders approved the modification of the Acreage Transaction and related Acreage Financial Instrument (the “New Acreage Agreement”), and the other required regulatory approvals necessary for the modification to be effective were granted. The New Acreage Agreement reduces (i) the ratio of Canopy shares required to be exchanged for Acreage shares upon U.S. Federal cannabis legalization and (ii) the number of Acreage shares subject to the fixed exchange ratio from 100% to 70%, calculated as a percentage of Acreage’s issued and outstanding shares (the “New Acreage Financial Instrument”). The remaining 30% of Acreage shares will be subject to a floating exchange ratio and Canopy, in its sole discretion, will have the option to acquire these shares with Canopy shares, cash or a combination thereof.
Canopy has various equity and convertible debt securities outstanding, including primarily equity awards granted to its employees, and options and warrants issued to various third parties, including our November 2018 Canopy Warrants, Canopy Debt Securities, and the New Acreage Financial Instrument. As of November 30, 2020, the conversion of Canopy equity securities held by its employees and/or held by other third parties, excluding our November 2018 Canopy Warrants, Canopy Debt Securities, and the New Acreage Financial Instrument, 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. If we exercised all of our November 2018 Canopy Warrants, it could have a significant effect on our share of Canopy’s reported earnings or losses and our ownership interest in Canopy would be expected to increase to greater than 50%. If Canopy exercised the New Acreage Financial Instrument, which would require the issuance of Canopy shares, it could have a significant effect on our share of Canopy’s reported earnings or losses and our ownership interest in Canopy would decrease and no longer be expected to be greater than 50%.
As of November 30, 2020, the exercise of all Canopy warrants held by us would have required a cash outflow of approximately $6.1 billion based on the terms of the November 2018 Canopy Warrants. Additionally, as of November 30, 2020, the fair value of the Canopy Equity Method Investment was $4,083.5 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. We recognize our equity in earnings (losses) for Canopy on a two-month lag. Accordingly, we recognized our share of Canopy’s earnings (losses) for the periods January through September 2020 and January through September 2019 in our nine months ended November 30, 2020, and November 30, 2019, results, respectively. We recognized our share of Canopy’s earnings (losses) for the periods July through September 2020 and July through September 2019 in our three months ended November 30, 2020, and November 30, 2019, results, respectively. The amounts shown represent 100% of Canopy’s results of operations for the respective periods, however, the results of operations for the nine months ended November 30, 2019, exclude the impact of the June 2019 Warrant Modification Loss because it was recorded by Canopy within equity. The nine months and three months ended November 30, 2020, includes costs designed to improve Canopy’s organizational focus, streamline operations, and align production capability with projected demand.
Subsequent events
In December 2020, Canopy announced its plans to close five Canadian production facilities as part of its efforts to streamline its operations and further improve margins. Canopy has publicly disclosed that it expects to record an estimated pre-tax loss of approximately C$350 million to C$400 million in their third and fourth quarters of fiscal 2021 results from the facilities closures. We expect to record our proportional share of Canopy’s estimated pre-tax loss of approximately C$130 million to C$155 million in our fourth quarter of fiscal 2021 and first quarter of fiscal 2022 results.
In December 2020, Canopy announced an agreement to divest its ownership interest in Canopy Rivers Inc. (“Canopy Rivers”) in exchange for (i) exchangeable shares, warrants, and debt in TerrAscend Corp., (ii) shares in Les Serres Vert Cannabis Inc., and (iii) the termination of a royalty agreement with The Tweed Tree Lot Inc. (the “Canopy Rivers Transaction”). As additional consideration for the assets being transferred and termination of the royalty agreement, Canopy will make a cash payment of C$115 million and issue 3,750,000 Canopy shares. The Canopy Rivers Transaction is subject to Canopy Rivers shareholder and regulatory approval.
Other equity method investment
Booker Vineyard
In April 2020, we invested in My Favorite Neighbor, LLC, also known as Booker Vineyard, a super-luxury, direct-to-consumer focused wine business (“Booker Vineyard”) which we account for under the equity method. We recognize our share of their equity in earnings (losses) in our consolidated financial statements in the Wine and Spirits segment.
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