Constellation Brands Invests $4 Billion in Canadian Cannabis Company


Constellation Brands raised their stake in cannabis producer Canopy Growth from 9.9% to 38%, investing a total of $4 billion (5 billion Canadian dollars). This news was announced on the Canadian company’s earnings call on Wednesday, August 16.

“Constellation’s incremental $4 billion (5 billion Canadian dollars) investment in Canopy Growth is the largest investment to date in the cannabis industry,” Constellation CEO Rob Sands says.

The money “is really rocket fuel,” Canopy Growth Founder and CEO Bruce Linton said. “It does add quite a lot. As we look around the world, we’re going to be adding production, we’re going to be doing research[…] We’re going to create more products, and we’re going to be way more global.”

In return for the investment, Constellation Brands will get 104.5 million shares of Canopy, at C$48.60 a share. The price represents a 51.2% premium over Tuesday’s close.

Under the deal, Constellation also gets 139.7 million warrants, which can be exercised over the next three years. The warrants will give Canopy another 5 billion Canadian dollars as well as four seats on Canopy’s board of directors. If Constellation exercises all of the warrants, it will own more than 50% of Canopy, which trades on the Toronto Exchange under the stock symbol WEED.

“Over the past year, we’ve come to better understand the cannabis market, the tremendous growth opportunity it presents, and Canopy’s market-leading capabilities in this space,” says Sands.

“As the leader in the total beverage alcohol space, we look forward to reaping the benefits of our cannabis investment, which we see as being incremental to our core beer, wine, and spirits portfolio.”

The deal is expected to be accretive by the 2021 fiscal year.

As of now, Canopy, which does not expect to purchase additional acreage for production in Canada, is focusing on the nearly 30 countries pursuing federally permissible legalization of cannabis.

Sands added that this new investment supersedes the previous agreement that said Constellation, which trades under the stock symbol STZ, would concentrate on non-alcoholic cannabis beverages.

Mixed Reviews

Investors in Canada sent Canopy’s shares soaring more than 31% to close at C$42.20, up from C$10.05. U.S. investors were considerably less enthusiastic about the deal, sending Constellation’s New York shares tumbling more than 8% before recovering a bit to close at $208.27, down $13.51 or just over 6%.

“[The size of Constellation’s investment] reflects the long-term attractiveness of the global cannabis opportunity beyond the launch of the Canadian adult-use market on Oct. 17,” said Vivien Azer, Cowen Analyst. She continues to rate Constellation a buy.

William Chappell, SunTrust Robinson Humphrey analyst, questioned how the transaction helps Constellation shareholders.

“We are just not certain what the incremental $4 billion investment brings to Constellation,” he wrote. “We remain bullish about STZ’s core business, which is the basis of our buy-rating, but we expect questions about this investment to linger.”

Published on August 16, 2018
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