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Canopy Growth shares close at all-time high after Constellation Brands deal

October 30, 2017 - 1:38 PM

The maker of Corona beer is branching out into marijuana with a minority stake in Canopy Growth Corp. (TSX: WEED), a "gamechanger" deal that sent the Canadian cannabis producer's stock to close at a new high.

Constellation Brands has signed a deal to acquire a nearly 10 per cent stake in Canada's biggest licensed producer of medical marijuana for $245 million, the companies announced Monday.

Canopy chairman and chief executive Bruce Linton said the partnership marks the first major wine, beer and spirits producer to invest in legal cannabis. Canopy and Constellation will also collaborate on cannabis-based drinks, he added.

Linton said he had as many as a dozen investment options on the table since Canopy began discussions with Constellation in the summer, for a similar or larger amount of money.

"But what they didn't come with was a partner who actually could work with us, and think with us, and help create things with us," he said in an interview.

Shares of Canopy Growth rose as high as $15.72 in Toronto in morning trading on Monday, up 22.9 per cent from $12.79 at close on Friday. Shares closed at $15.22, up 19 per cent and marking its highest close ever.

Under the deal, Constellation will buy a 9.9 per cent stake or nearly a 18.9 million shares in Canopy for $12.9783 per share. It will also acquire an equal number of common share purchase warrants for Canopy.

Constellation said the deal is part of its strategy to stay ahead of evolving consumer trends and market dynamics, while maintaining focus on its core beverage alcohol business.

"Canopy Growth has a seasoned leadership team that understands the legal, regulatory and economic landscape for an emerging market that is predicted to become a significant consumer category in the future," said Constellation chief executive Rob Sands, in a statement.

Vahan Ajamian, an analyst with Beacon Securities, called the transaction a "gamechanger for Canopy, as well as the industry at large."

The deal highlights the disruption alcohol companies will likely face from recreational cannabis, he added in his note to clients.

"We suspect more alcohol companies may look to accelerate plans to enter the industry – as well as pharmaceutical and tobacco companies," Ajamian said Monday.

Constellation added that it has no plans to sell any cannabis products in the U.S. or any other market unless or until it is legally permissible to do so at all government levels.

Canada is moving towards a July 2018 deadline for legalization of recreational marijuana, but sales of edibles will come later once regulations for production and sale can be developed.

Linton says Canada will likely be its first market for cannabis-infused beverages.

"They've been fairly clear that in 2019 they expect to enhance and expand that offering," he said. "Will that include vaporizeable products, edible products or liquid drinkable products? Could be any or all of them. So we're talking now about a year and a half away, potentially."

Although recreational marijuana is legal in certain states, Canopy has no plans to market these products in the U.S. until marijuana is federally legal south of the border, he added.

In the meantime, Canopy has a license with an exemption that will allow it to create and develop cannabis products for a future market, he added.

"It does give us a platform for which we can create formulations and compounds that go towards medical or it could go to differentiated products (for) adult access," he said.

He is optimistic that these cannabis-infused beverages, which will not have alcohol, will appeal to consumers who want a more "socially-normalized" way of consuming marijuana.

"What they really want is a way to access the product that feels socially, more standard," he said. "And I think beverages might be that format."

The companies said Monday the agreement will see Constellation provide marketing and brand development support to Canopy.

Linton said Constellation, which has about 40 wineries, breweries and distilleries in its portfolio, has leveraged its experience navigating restrictions on marketing in the various jurisdictions it operates in.

Still, it's unclear the extent to which licensed producers can advertise and market their products. The proposed Cannabis act stipulates that any promotion, packaging or labelling of cannabis that could be appealing to young persons or encourages consumption would be prohibited.

The framework may be more akin to advertising regulations for tobacco, which are more restrictive than those that apply to alcohol.

"They're going to evolve," Linton said. "We're going to land somewhere in between booze and cigarettes in our current rules."

News from © The Canadian Press, 2017
The Canadian Press

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