Constellation’s $5B investment in Canopy may usher in ‘disruption’
Deal dubbed ‘largest to date’ in pot space poses threat to established industries
TORONTO A blockbuster $5 billion investment by U.S.-based alcoholic beverage company Constellation Brands Inc. in leading Canadian pot producer Canopy Growth Corp. has raised the stakes in the global cannabis industry, and may be the loudest wake-up call yet for potential competitors in Big Booze, Big Pharma and Big Tobacco.
If approved, the arrangement announced Wednesday could see Constellation’s ownership stake in Canopy rise to 38 per cent, though it also includes warrants that if exercised could eventually take that stake above 50 per cent.
Canopy chairman and co-chief executive Bruce Linton suggested that the deal could help the two firms steal a march on other corporate giants, such as the Big Pharma companies, before they get into — or further into — the cannabis business. “This is about accelerating and getting way further out there before those other big names are in,” Linton said during a conference call with analysts. “They have to get in the space, because this is the most disruptive, rapid growth opportunity for (earnings before interest, taxes, depreciation, and amortization) that any of them are looking at.”
Linton called the capital injection “rocket fuel,” and said Canopy’s “current target acquisition list” for international and noncultivation assets tops $1 billion.
Wednesday ’s announced investment, which the companies said would be “the largest to date in the cannabis space,” may have also have put a target on the backs of other industries that could be competing with pot producers for consumers.
“The increased investment by (Constellation) also further validates cannabis as both a threat and opportunity for large established industries like alcohol, tobacco and pharmaceuticals,” wrote Eight Capital analyst Graeme Kreindler.
Cormark Securities analyst Jesse Pytlak said in an email that the “cannabis disruption” of other industries is just getting underway.
“As these companies become familiarized with the sector and the opportunity that exists, we believe we will see other partnerships and takeovers,” Pytlak added.
The Canopy-Constellation transaction would indeed be another step into the cannabis sector by an alcohol industry giant. In addition to the Canopy-Constellation teamup, Quebec-based Hydropothecary Corp. and Molson Coors Canada have said they are partnering in a joint venture focused on cannabisinfused beverages.
Pending shareholder and regulatory approval, the deal is scheduled to close by the end of October.
“Through this investment, we are selecting Canopy Growth as our exclusive global cannabis partner,” said Rob Sands, CEO of Constellation, in a release. “Over the past year, we’ve come to better understand the cannabis market, the tremendous growth opportunity it presents, and Canopy’s marketleading capabilities in this space.”
The amount of money and influence at stake also emphasized how big a deal it could be for Constellation, Canopy and the cannabis industry. According to Canopy, it would use the funds to build or buy (or both) “key assets needed to establish global scale in the nearly 30 countries pursuing a federally permissible medical cannabis program, while also rapidly laying the global foundation needed for new recreational cannabis markets.”
Echelon Wealth Partners analyst Russell Stanley noted that Canopy’s management signalled Wednesday that their international interest lays in Europe, Latin America and the United States — although the pot producer stressed that it “remains committed to not entering the U.S. market in any manner that would contravene U.S. federal laws.”
“These growth opportunities reportedly go well beyond the original plan for this partnership, which simply contemplated development of cannabis-infused, non-alcoholic beverages,” Stanley wrote.
Some of the other names involved in the deal underscored its importance as well. Goldman Sachs Group Inc. advised Constellation on the transaction, a release said, and Bank of America Merrill Lynch will provide the financing. Canopy also received financial advice from the Canadian arm of Greenhill & Co., the New York-based investment bank that advised the federal government on its $4.5-billion purchase of the Trans Mountain pipeline.
The increased investment follows an earlier transaction between the two companies last year that saw Constellation — a Fortune 500 company that sports brands like Corona beer — buy nearly 10 per cent of Canopy for $245 million, in what was then a major milestone for Canada’s burgeoning marijuana sector.