Feds examine blockbuster constellation, canopy deal
Proposed pact likely the first of its kind reviewed under Investment Canada Act
TORONTO A deal that could see U.S.based alcohol giant Constellation Brands Inc. take a majority ownership stake in leading cannabis producer Canopy Growth Corp. will be reviewed by the federal government, a spokesperson for Innovation, Science and Economic Development Canada confirmed on Friday.
Smiths Falls, Ont.-based Canopy and Victor, N.Y.’s Constellation announced a proposed transaction Wednesday that involves Constellation investing approximately $5 billion in Canopy in a deal that could raise its stake in the marijuana firm to around 38 per cent.
The deal also includes warrants that could let Constellation buy even more shares of Canopy, potentially growing Constellation’s ownership in Canopy above 50 per cent — at a cost of at least another $4.5 billion.
What’s more, the proposed transaction would also allow Constellation to nominate four of the seven directors on Canopy ’s board.
Pending shareholder and regulatory approval, the deal is scheduled to close by the end of October.
But the investment, which the companies said would be “the largest to date in the cannabis space,” will apparently draw scrutiny from the Canadian government as well.
“We can confirm that U.S.based Constellation Brands Inc.’s proposed investment in Canopy Growth Corporation is subject to review under the Investment Canada Act,” said Hans Parmar, a spokesperson for Innovation, Science and Economic Development Canada, in an email on Friday. “The proposed acquisition, like all foreign investment transactions, will be reviewed on its merits based on the overall economic benefit for Canada.”
That review is also likely to be a first for Canada, the spokesperson added.
“The proposed transaction would very likely be the first cannabis-related investment reviewed under the Act given the only recent passing of legislation to legalize cannabis,” Parmar said.
A presentation on the deal by Constellation had suggested the transaction may require approval under the Investment Canada Act, legislation that says it is intended to “provide for the review of significant investments in Canada by non-Canadians.”
An order issued under the same act scuttled a proposed takeover of Canadian construction firm Aecon Group Inc. by a Chinese state-owned company earlier this year, albeit in the name of national security.
While it seems doubtful a cannabis deal poses any sort of similar concerns, Parmar said that the federal government is required to review proposed purchases of Canadian companies by foreign businesses when the value of the deal hits a certain level, which is currently $1.5 billion “for investments originating in trade-agreement-partner countries, such as EU member countries.”
Asked if Constellation’s ultimate goal is to take control of Canopy, the head of the pot producer said Wednesday that he couldn’t speak for his U.S. counterparts.
“But I suspect if we do what we’re going to do, which is build a global platform that generates massive amounts of (earnings before interest, taxes, depreciation, and amortization) over the next few years, that is a pretty amazing company that everybody would think is a good one to own,” said Canopy chairman and co-CEO Bruce Linton during a conference call with analysts.
The Canopy-Constellation deal also highlights Canada’s status as a leader in the marijuana industry. When Canada legalizes recreational pot on Oct. 17, it will be the first G7 country to do so, setting itself up as a test case for the rest of the world to watch.
Walid Hejazi, an associate professor of international business at the University of Toronto’s Rotman School of Management, warned that the Canadian government being too overprotective could harm the industry and consumers.
“If we want Canada to be globally competitive in cannabis, we should be open to foreign direct investment that will bring lots of capital and technology to Canada,” Hejazi said in an interview. “And it will force Canadian companies to adopt global best practices.”