U.S. al­co­hol gi­ant buys into Canopy

Con­stel­la­tion deal seen as a po­ten­tial turn­ing point for cross-in­vest­ment

Calgary Herald - - FP CALGARY - GE­OFF ZOCHODNE Fi­nan­cial Post gzo­chodne@post­media.com Twit­ter.com/ge­of­f­zo­chodne

U.S.-based bev­er­age gi­ant Con­stel­la­tion Brands Inc. is buy­ing up to 20 per cent of Canopy Growth Corp. in a ground­break­ing deal that lends le­git­i­macy to Canada’s fast-grow­ing mar­i­juana in­dus­try while po­ten­tially throw­ing open the door to ad­di­tional in­vest­ments in the sec­tor by big in­ter­na­tional com­pa­nies.

Ac­cord­ing to the terms an­nounced Mon­day, an af­fil­i­ate of Con­stel­la­tion, the New York­based maker of Corona beer and Kim Craw­ford wines, will pay ap­prox­i­mately $245 mil­lion for a 9.9-per-cent stake in Canopy, Canada’s largest li­censed pro­ducer of med­i­cal mar­i­juana.

The terms also give Con­stel­la­tion com­mon share pur­chase war­rants that could al­low it to dou­ble its stake in the Smiths Falls, Ont.based Canopy for the same price — about $12.98 per share.

Canopy shares surged 19 per cent on Mon­day to close at $15.22.

Con­stel­la­tion’s war­rants are bro­ken up into two equal tranches that can be ex­er­cised on Aug. 1, 2018 and Feb. 1, 2019.

Matei Olaru, chief ex­ec­u­tive of Lift, a Cana­dian cannabis me­dia and tech­nol­ogy com­pany, said that within the in­dus­try the en­try of a sig­nif­i­cant al­co­hol player had for a long time been seen as a po­ten­tial turn­ing point.

“It val­i­dates the com­pet­i­tive na­ture of cannabis ver­sus al­co­hol, the op­por­tu­nity from a recre­ational per­spec­tive, plus I think it will open the flood­gates for cross-in­vest­ment,” he said, pos­si­bly lead­ing to other moves by Big To­bacco, Big Pharma or ri­val al­co­hol com­pa­nies. “Be­cause now their com­peti­tors are in and they’re not. So I def­i­nitely think this is a huge step for­ward.”

It’s also “a bold move” by Canopy chair­man and chief ex­ec­u­tive Bruce Lin­ton, said Chris Da­mas, a vet­eran an­a­lyst and ed­i­tor of the BCMI Re­port and the BCMI Cannabis Re­port news­let­ters.

“I be­lieve (Lin­ton) should be called Cap­tain Kirk on this one,” Da­mas said. “He’s go­ing where no one’s gone be­fore, and it should be in­ter­est­ing to see what the U.S. feds say about this.”

The deal marks the first ma­jor foray of an al­co­hol com­pany into the mar­i­juana busi­ness, but Con­stel­la­tion said it won’t sell any cannabis prod­ucts in the U.S. or abroad “un­til it is legally per­mis­si­ble to do so at all gov­ern­ment lev­els.”

While a num­ber of U.S. states have le­gal­ized mar­i­juana for recre­ational or medic­i­nal pur­poses, it re­mains an il­licit sub­stance in the eyes of the fed­eral gov­ern­ment.

The Cana­dian gov­ern­ment, mean­while, is mov­ing to­ward the le­gal­iza­tion of recre­ational cannabis by July.

The unique sit­u­a­tion led the Toronto Stock Ex­change to warn cannabis com­pa­nies ear­lier this month that they could be delisted if they are break­ing U.S. fed­eral law.

“Is the DEA and (U.S. At­tor­ney Gen­eral) Jeff Ses­sions OK with An­heuser-Busch buy­ing Phar­ma­Cielo?” asked Da­mas of a hy­po­thet­i­cal deal be­tween the big Amer­i­can brewer and a com­pany that re­cently re­ceived a li­cence to grow cannabis is Colom­bia. “What about Philip Mor­ris buy­ing a Cana­dian (li­censed pro­ducer of mar­i­juana)? Are the fed­eral Lib­er­als OK with that deal?”

The Canopy-Con­stel­la­tion deal has been con­di­tion­ally ap­proved by the TSX, Canopy said in a press re­lease. The trans­ac­tion is ex­pected to close on or about Nov. 2, with no other ap­provals re­quired aside from that of the stock ex­change.

But Da­mas said it was a “ques­tion mark” as to whether U.S. agen­cies like the Depart­ment of Jus­tice or Se­cu­ri­ties and Ex­change Com­mis­sion take an in­ter­est in the trans­ac­tion.

“I be­lieve Canopy will ben­e­fit quite im­mensely if this does (go through), be­cause it will pretty much val­i­date them in terms of in­sti­tu­tions in the U.S. in­vest­ing in them,” Da­mas said.

Jamie Nagy, co-head of Cana­dian merg­ers and ac­qui­si­tions at Canac­cord Ge­nu­ity, said the com­pa­nies would have given the le­gal and reg­u­la­tory side of the deal some thought.

“They’re not do­ing any­thing that’s il­le­gal,” he said. “I would as­sume that they would have had a fair team of lawyers check­ing that out.”

Nagy has been an­tic­i­pat­ing another “wave” of con­sol­i­da­tion in the cannabis in­dus­try, which may see big liquor or phar­ma­ceu­ti­cal com­pa­nies try to get in­side.

“I think those other guys have been look­ing at it al­ready,” Nagy said. “Con­stel­la­tion’s clearly putting a stake in the ground and lay­ing claim to their horse.”

Nagy said that Canopy-Con­stel­la­tion deal will “ac­cel­er­ate the time­line” for those out­siders to do their home­work on pos­si­ble deals and po­ten­tially in­crease their ap­petite for risk, given there is still some un­cer­tainty in the Cana­dian cannabis in­dus­try. Most prov­inces have yet to un­veil their plans for re­tail­ing le­gal­ized recre­ational cannabis and the fed­eral gov­ern­ment has yet to pass its le­gal­iza­tion leg­is­la­tion.

Da­mas sees the move more as a “trial bal­loon.”

“My per­sonal opinion is they’re go­ing to want to see what hap­pens,” he said of com­pa­nies think­ing of fol­low­ing Con­stel­la­tion’s lead.

Canopy and Con­stel­la­tion will de­velop “cannabis-based bev­er­ages,” and sell them in mar­kets where they are le­gal, Canopy said, adding that it will use most of the pro­ceeds to pay for re­search and de­vel­op­ment and to boost its in­ter­na­tional grow­ing ef­forts.


Amer­i­can bev­er­age gi­ant Con­stel­la­tion will pay nearly $245 mil­lion for a 9.9-per-cent stake in Cana­dian med­i­cal mar­i­juana pro­ducer Canopy Growth Corp. The firms plan to de­velop “cannabis-based bev­er­ages,” and sell them in mar­kets where they are le­gal.

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