Brewer’s weed stake goes to pot

Pot and beer may seem like a sure-fire way to get high. But in the case of Constellation Brands, its bet on Canadian cannabis farmer Canopy Growth is leaving investors with an enormous downer.

The US-based brewer of Corona beer is slashing the fair value of its 38% stake in Canopy for the second time in 2019. It said it was taking a $839m charge for the weed producer. This follows the $828m reduction Constellation disclosed during its first-quarter earnings in June.

Constellation transformed over the past decade from a boxed-wine seller into a $38bn beverage giant. It then went looking for a different sort of thrill. It decided to add a hit of cannabis to its portfolio of beer, wine and liquor brands. It has invested about Canadian $5.2bn (US$3.9bn) in Canopy since 2017.

In hindsight, Constellation should have stuck with what it knew best: booze. After a meteoric rise in 2018, weed stocks have mostly struggled to live up to the hype. Canopy’s shares are down about 55% over the past 12 months. It booked a Canadian $1.3bn loss in its latest quarter. This has translated into a near-$500m loss on Constellation’s books.

Between this and the writedown, Constellation was forced to sharply lower its earnings guidance on Thursday. It expects full-year earnings to come in at 55-75c a share. That compares to the $4.95 and $5.25 range it gave just three months ago. The Canopy writedown was a low point in an otherwise strong quarter for Constellation. Its core beer business, which accounted for about 85% of operating profits in 2018, has been bucking the industry trend of sliding volumes thanks to the popularity of its Mexican beer offerings: Corona, Modelo and Pacifico.

After rallying more than a fifth in 2019, Constellation’s valuation looks heady given the hangover to come from Canopy. London, October 5

© The Financial Times Limited 2019