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On Thursday, Canopy announced that it had given a 60-per-cent stake in a cultivation operation in Toronto to hip-hop star Drake.

CHRIS DELMAS/AFP/Getty Images

Canopy Growth Corp. appears to have come up with a unique formula for putting underutilized cultivation assets to work: swap them for celebrity branding rights.

On Thursday, Canopy announced that it had given a 60-per-cent stake in a cultivation operation in Toronto to hip-hop star Drake.

The operation was once owned by Bedrocan Canada Inc., which Canopy acquired in 2015 for $64-million. Ahead of the deal with Drake, Bedrocan, now a wholly owned subsidiary of Canopy, was restructured and the cultivation licence for the facility in Scarborough was shifted over to a new entity called More Life Growth Co.

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Drake was then handed a 60-per-cent stake in More Life. Canopy, in return, acquired the right to license a number of brands that Drake will develop for More Life.

Always an innovative deal maker, Canopy’s transaction appears to solve two problems: what to do with an underused asset, and how to get around restrictions on celebrity endorsements.

Bedrocan, located in a Scarborough industrial park, was Canopy’s first significant merger, and it set the company on a path to industry dominance back in 2015. The 50,000-square-foot indoor growing operation, however, is no longer a key component of Canopy’s cultivation infrastructure.

Bedrocan BV, Canopy’s erstwhile Dutch partner in the Scarborough operation, parted ways with Canopy in 2016 when the Canadian company began to pivot towards the recreational marijuana market. In mid-2018, Canopy ceased selling Bedrocan-branded products, as part of a dispute with Bedrocan BV. The Scarborough facility was the main Bedrocan production site.

In other words, Canopy had a spare license which could be put to better use. (Canopy never actually owned the Bedrocan building; it leased it from Murray Goldman, a former Canopy board member).

“There are some other companies across the country that would be able to do [a deal like] this, but certainly a number of [LPs] are only holding one or two cultivation licenses and that would be a significant production platform out of their total assets to spin off,” said Jonathan Sherman, a partner with the law firm Cassels Brock & Blackwell LLP, who worked on the deal.

While Canopy has done celebrity deals in the past – with Snoop Dogg, Martha Stewart and Seth Rogen – this one is structured differently, and could potentially avoid certain celebrity branding restrictions in Canada.

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"It’s really structured as a partnership between the entities, but it’s not an endorsement agreement, in that Drake’s name and likeness will not be used in the promotion and endorsement,” explained Len Glickman, another Cassels partner who worked on the deal.

It’s a clever arrangement. Canopy does not need to say Drake has endorsed More Life products, as it did with Leafs By Snoop, which was rebranded as LBS to stay onside Health Canada rules. Canopy can do one better, publicizing the fact that Drake literally owns the facility where the weed is being grown.

As for Drake, he makes money as the majority owner of a licensed producer. More Life will generate revenue selling wholesale cannabis to Canopy, which will continue running the facility and will have the exclusive right to buy and distribute cannabis produced there. (Canopy will also have the right to nominate two directors to More Life’s board).

More Life will also receive royalty payments from Canopy on the sale of More Life branded products.

The agreement is structured so that not all More Life-branded cannabis needs to be grown in the former Bedrocan facility. Canopy could grow cannabis in another facility and put a More Life label on it, giving the brand scalability beyond the 4,000 kilograms of annual production that the Bedrocan facility is capable of.

“There are a number of provisions in these agreements with respect to quality of that product, to ensure that it’s in line with the quality standards that More Life would expect," Mr. Sherman said.

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It’s hard to calculate exactly how much Canopy paid Drake for the partnership. Canopy bought Bedrocan in 2015 for $64-million. That suggests a $38.5-million payday for Drake.

That said, the value of cultivation licences has dropped significantly in recent years, and the original Bedrocan acquisition included a second licence focused on importation as well as intellectual property from Bedrocan BV, neither of which have passed to More Life.

Mr. Sherman would not comment on the value of the deal, but he did say that “in exchange for intellectual property rights, Canopy was obviously comfortable issuing 60 per cent of equity in the company to Drake."

"There are also relationships between that entity and Canopy that ultimately make Canopy feel comfortable with the transaction as it’s structured. There’s certainly an opportunity for Canopy and Drake to work together on this internationally and not just in Canada, and to potentially grow this business so that at the end of the day for both Canopy and for Drake it’s worth more than just the one asset that’s here in Canada,” he added.

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