Why Corona Beer Breaks Its Bank On A $3.8 Billion Stake Increase In Cannabis
August 16,2018 | By Bloomberg by Stefanie Marotta
Constellation Brands Inc. is positioned to grow a global cannabis empire with Canopy Growth Corp. and rocket the Canadian pot grower to a leading position on the world’s weed stage, according to analysts.
The brewer of Corona beer is spending C$5 billion ($3.8 billion) to increase its stake in the Canadian cannabis grower to 38 percent, with the company touting the move as the biggest investment in the burgeoning marijuana industry yet. “We believe this sizable investment clearly confirms Constellation’s commitment to growing out a global cannabis platform with Canopy,” Canaccord analyst Neil Maruoka wrote in a note Wednesday.
The transaction is expected to close in October 2018 -- the same month Canada is slated to legalize recreational pot -- and it may even act as a “prelude to eventual full ownership,” Bloomberg Intelligence analyst Kenneth Shea wrote following the announcement.
Constellation took on a minority stake in the pot company in October, paying about C$245 million for an almost 10 percent stake. While it initially appeared to be a strategy to fend off cannabis-cannibalizing alcohol sales, Constellation has shifted to seeking a leading position in the weed game, according to Maruoka. As part of the agreement, Constellation will also receive 139.7 million warrants that can be exercised over the next three years, increasing its stake to more than 50 percent.
“With a potential controlling stake in the works, Constellation is committed to providing a substantial amount of capital to increase Canopy’s already leading position in Canada, and now potentially the world stage,” Maruoka wrote. The deal provides Smiths Falls, Ontario-based Canopy with capital that is “second to none in the industry” that could propel the company into as many as 30 countries worldwide, he added, from 11 now.
Canopy surged as much as 52 percent to a record high in Toronto. Constellation fell as much as 9.2 percent in New York, the most in nearly two years. Alcoholic beverage peer Diageo Plc also declined, though the London, England-based producer counts Turkey as a key growth market, according to Bloomberg Intelligence analyst Duncan Fox, which is suffering its own bouts of volatility.
Some analysts checked their optimism at the door. “Looking forward, much work and change still needs to occur in order for this industry to realize its full potential,” Cowen analyst Vivien Azer wrote in a separate note today. Even as Canada’s legalization date looms on October 17, the bet hinges on pot picking up ground in the U.S. and around the world.
Canada will be the first G-7 country to allow recreational use of marijuana. In the U.S., only seven states permit recreational pot sales and the drug is outlawed at the federal level.