Canopy stirs market, raises glass to $5B deal with alcohol company
No one doubted this deal would be approved. Canopy Growth, the Smiths Falls marijuana products company, confirmed Wednesday that shareholders representing more than 95 per cent of the company ’s shares have approved a deal that will see Constellation Brands invest $5 billion.“This sounds like a big number,” Canopy Growth chief executive Bruce Linton told shareholders, “but we already know how to spend it and are figuring out priorities.”Constellation Brands, a U.S. beer, wine and liquor company, will now be able to bump up its ownership stake in Canopy from 8.5 per cent to 38 per cent. It also has the right to increase its equity position to 55 per cent.It’s a potentially transformative deal both for Canopy and the marijuana products industry it is seeking to dominate — something that was reflected in the stock market bubble that popped up when Constellation Brands announced its investment on Aug. 15.By Sept. 20, the market value of Canopy Growth had jumped $8.1 billion. More remarkable, the combined value of 14 of its Canadian competitors had climbed $15 billion while a trio of U.S.-listed marijuana firms, led by Tilray, had soared nearly $20 billion.In short, 18 publicly traded marijuana firms that had been worth $43 billion on Aug. 14 were suddenly valued at nearly $72 billion.This is all because Constellation Brands and Canopy Growth are collaborating to develop cannabis-based beverages and other products that likely won’t be legal in Canada until at least a year following the Oct. 17 legalization of recreational marijuana.Shareholders are betting that this combination — along with other potential matchups between marijuana firms and beverage or food producers — will produce a wave of innovation and fresh ideas for products.Constellation Brands’ initial $245 million investment in Canopy, which closed Nov. 2, 2017, had limited collaboration to cannabisbased beverages. Under the new arrangement, the firms will codevelop products across the entire range of cannabis extracts.Not under consideration is the idea of blending alcohol and cannabis. “These do not mix and shouldn’t mix,” Linton said in response to a shareholder’s query.“We never contemplated it in our business plan.”Canopy will draw heavily on Constellation Brands’ expertise in premium branding, large-scale production, sales channels and distribution. Long before the shareholders’ meeting, Canopy had begun work converting a nearby building into a bottling facility.For the moment, Canopy is focusing much of its attention on serving the medical-marijuana market, in which it is a leading global player, and the soon-to-be legal-in-Canada market for recreational marijuana. Deloitte, a consulting group, estimates sales of medical and recreational cannabis next year in Canada could range from $2.6 billion to $6.1 billion, depending on how enthusiastically people embrace the new products and whether they begin substituting liquor with cannabis.One of the catalysts for the Canopy Growth-Constellation Brands partnership was the idea that legal cannabis is poised to cannibalize liquor sales.Indeed, the origins of the deal go back to mid-November 2016 when Constellation Brands CEO Robert Sands publicly mused that “there are going to be alcoholic beverages that will also contain cannabis” and added that his company was “looking at it.” Sands later amended this to include only nonalcoholic beverages in pursuit of new sources of revenue.The moment senior executives at Canopy saw those words, quoted in Bloomberg News, they used LinkedIn and other social media to establish a connection with Constellation Brands’ managers.What emerged from these contacts was the knowledge that Sands — the son of Constellation Brands’ founder Marvin Sands — had been mulling the idea of cannabis as a potential threat to his business, a $7.3 billion-a-year operation with more than 9,000 employees. It would be better to collaborate in some fashion with a significant cannabis player, he told colleagues, to help offset the potential decline in his spirits business.Initial contacts between the firms led Constellation Brands last November to acquire up to 16.5 per cent of Canopy Group’s equity. The arrangement gave Constellation Brands the right to observe Canopy Growth’s board of directors meetings as well as insight into operations.Constellation Brands, for its part, helped Canopy understand how to analyze markets, consumers and branding in general.By late July, according to documents filed with the U.S. Securities and Exchange Commission, senior Constellation Brands officials David Klein and Garth Hankinson pressed Canopy CEO Linton on the idea of a much larger equity investment. Not only that, Canopy would become Constellation’s “sole platform for addressing the cannabis market.”On July 30, Hankinson phoned Linton to say he would be delivering a non-binding offer that would result in Constellation holding 40 per cent of Canopy Growth’s shares, with the option of taking it up to 55 per cent.This move prompted a series of internal meetings at Canopy Growth, including the key session on Aug. 10 — just five days before the deal was unveiled. Aside from discussing endless financial permutations, Linton and his fellow board members debated the firm’s other options — including the benefits and risks of a go-it-alone strategy.What swayed the board in the end appears to have been the help Constellation Brands would be able to provide in ensuring a successful global rollout. Constellation Brands’ familiarity with marketing to many countries, along with its financial clout, likely tipped the balance.The arrangement means Canopy Growth now has plenty of cash when it needs it the most.It’s in a global race in three separate but related markets — medical marijuana, recreational cannabis and cannabis-infused foods and drinks. Whether it will succeed in any or all of these markets is anybody ’s guess, but the Constellation Brands deal might up its chances.As for the potential of Constellation Brands eventually shifting the headquarters from Smiths Falls, it seems remote for now. Canopy Growth has already invested a quarter of a billion dollars on its Smiths Falls location — the only one among more than a dozen worldwide that contains nearly all aspects of the company ’s business, from R&D to manufacturing.It is, presumably, one of the things Constellation Brands liked about Canopy Growth, and why it’s prepared to pay billions for a big piece of it.
Canopy Growth has seen its valuation soar, along with other cannabis producers, since an investment by Constellation Brands.
Canopy Growth CEO Bruce Linton helped broker an equity investment by global beer, wine and liquor giant Constellation Brands.
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