Canopy Growth shares soar after Corona parent firm Constellation invests $5B

Linton
Canopy Growth co-CEO Bruce Linton.

Alcohol giant Constellation Brands will invest $5 billion in Canopy Growth Corp. – the largest strategic investment in the cannabis space to date – which the Ottawa-area pot producer says will help it scale up and fend off competition from established players in big pharma and booze who are hungrily eyeing the pot industry.

Canopy (TSX:WEED)(NYSE:CGC) co-CEO Bruce Linton called the infusion of capital "rocket fuel" for the Smiths Falls-based licensed producer, enabling it to extend its global reach as more markets legalize cannabis around the world.

Canada will this fall become the second country in the world to legalize cannabis for recreational use, sparking a flurry of activity in the homegrown sector. But in the coming years, Canopy's competition will be the likes of "big pharma," and "packaged beverage," rather than Canadian cannabis companies, Linton told analysts on a conference call Wednesday.

"This about accelerating and getting way further out there before those other big names are in," Linton said. "Getting our products, staking our claims, having the leverage that we have now and moving up."

As part of the deal, the global producer of beer, wine and spirits will make Canopy its exclusive global cannabis partner.

Constellation Brands will own 38 per cent of Canopy under the deal, in which it will acquire 104.5 million Canopy shares at a price of $48.60 per share. Canopy shares were up as high as 30 per cent at $41.82 in morning trading on Wednesday but settled back at $40.25 in the early afternoon.

Global ambitions

The investment follows a deal last year that saw the Corona-beer maker acquire a nearly 10 per cent stake in Canopy for $245 million and included collaboration on the development of cannabis-based drinks.

Its chief executive Rob Sands called the deal a "powerful partnership" as markets for cannabis are "opening up much more rapidly than appreciated."

"This is an extremely exciting time to be part of what could potentially be one of the most significant global growth opportunities for the next decade," Sands told an investor conference call Wednesday.

The Constellation deal comes as other alcohol companies have also started honing in on the cannabis industry. Earlier this month, Molson Coors Canada entered into a joint venture with Gatineau’s Hydropothecary Corp. to develop non-alcoholic cannabis-infused products. As well, Heineken-owned Lagunitas Brewing Co. recently introduced a cannabis-infused hoppy sparkling water in California.

Constellation's investment on Wednesday is by far the largest strategic investment seen in the space to date, said Russell Stanley, an analyst with Echelon Wealth Partners in a research note.

"Cannabis is quickly becoming a truly global business ... We view the Canopy/Constellation news as further proof that a global market opportunity awaits, with Canadian-listed companies well positioned to participate given their head start and superior access to capital," he said.

Linton said Wednesday the money would largely be used to position the licensed producer for international expansion opportunities as cannabis becomes legal in new regions. Priority markets include the United States, Europe and Latin America, he added.

"As we look around the world, we're going to be expanding production, we're going to be doing more research, we're going to develop more intellectual property... And we're going to be way more global," he told analysts on a conference call.

Canopy's target acquisition list exceeds $1 billion for international assets and non-cultivation assets in Canada, Linton said. The licensed medical cannabis producer doesn't intend to acquire any cultivation assets at home, as it is easier to build their own, but would be eyeing domestic assets such as bottling lines, he added.

U.S. pot potential

As part of the partnership, Canopy has a services arrangement with Constellation to use its resources, which would help with a U.S. expansion once permitted, Linton added.

The U.S., where cannabis is legal for medical or recreational use in several states but remains illegal at the federal level, is the "best market" and will become "federally legal sooner than people think," he said.

"We are going to do everything that is fully federally lawful to be available in a market. And we think there are mechanisms of action that we can take that we're working through. There will be nothing federally illegal in what we do," he said.

Constellation will also receive 139.7 million new warrants, which are exercisable over the next three years. If Constellation exercises all of its existing and new warrants, its ownership in Canopy would exceed 50 per cent.

The agreement Wednesday will also see Constellation nominate four directors to Canopy Growth's seven-member board of directors. The investment, which is expected to close by the end of October, is subject to customary closing conditions, including Canopy shareholder approval and regulatory approvals.

The investment deal came as Canopy reported a loss of $80.3 million or 40 cents per share for the quarter ended June 30 as it continued to ramp up its operations ahead of the legalization of recreational cannabis in Canada later this year.

The loss compared with a loss of nearly $9.1 million or six cents per share a year ago.

Revenue for the three-month period totalled $25.9 million, up from nearly $15.9 million in the same quarter a year earlier.

- With files from OBJ staff.