Shares of Canopy growth (NASDAQ: CGC) are down 13% this week as of Thursday’s close, according to data from S&P Global Market Intelligence, after the cannabis producer completed a reverse stock split and the divestiture of a small subsidiary.
Canopy Growth’s stock consolidation just went into effect
Canopy Growth shares also fell more than 35% last week as the company revealed the structure of its then-in-progress 1-for-10 “stock consolidation,” also known as a reverse stock split. Canopy Growth’s consolidation officially took effect before the market opened yesterday (December 20), reducing the number of shares outstanding by a factor of 10, while increasing the price per share of the new common stock by the same multiple.
But why did Canopy Growth have to make this move in the first place? According to the rules of the Nasdaq On the exchange where Canopy Growth shares trade, any stock that closes below $1 per share for 30 consecutive business days risks being delisted, although stocks that break the rule can also come back into compliance by trading for 10 consecutive trading days or above $1 per share. Canopy Growth shares were down more than 70% year-to-date at the time of last week’s announcement and have hovered below the $1 mark since mid-September 2023.
Canopy closed today at $4.51 per share after the consolidation. So barring a nearly 80% decline from these levels, Canopy Growth should have little trouble returning to Nasdaq compliance by staying above $1 per share over the next eight trading days.
Why Canopy Growth needs to show progress
Of course, it’s worth revisiting why Canopy Growth investors were upset by this particular stock consolidation. Reverse splits are typically a zero-sum game, where the value of investors’ stakes remains the same throughout the process. But Canopy Growth’s stock consolidation deviated from the norm because the company decided not to compensate investors for any fractional shares resulting from the consolidation.
For example, in a typical 1-in-10 inverse split, an investor who owned 19 shares of a stock trading at $0.52 per share would receive one share worth $5.20, as well as $4.68 in cash for the remaining nine shares at a price of $0.52. a piece. But with Canopy Growth’s consolidation structure, the same investor would have exchanged ten original shares for one new share worth $5.20 and received nothing for the remaining nine original shares.
Canopy Growth must also show continued progress in its underlying businesses to avoid falling below the $1 per share level again in the future.
To that end, Canopy Growth announced Monday that it has completed the sale of its skincare and wellness brand “This Works” for approximately $12 million. The move should help Canopy Growth sharpen its focus on its core North American cannabis market, while transforming it into what CEO David Klein describes as “a simplified, asset-focused, cannabis-focused business.”
In the meantime, however, it’s no surprise that Canopy Growth continues to pull back this week, given the risk that the transformation won’t unfold as planned, and as the market digests the shareholder-unfriendly nature of the reverse split.
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Steve Symington has no position in any of the stocks mentioned. The Motley Fool recommends Nasdaq. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
