Canopy stirs mar­ket, raises glass to $5B deal with al­co­hol com­pany

PressReader - Tke Channel - 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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