U.S. beverage giant buys into Canopy
Constellation deal seen as a potential turning point for cross-investment
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.