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Constellation Brands Invests in Cannabis, Expands Canopy Stake

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Constellation Brands Inc. (STZ - Free Report) seems to be gearing up to gain from opportunities in the fast-growing cannabis market as it expands stakes in the biggest listed cannabis company, Canopy Growth Corporation (CGC - Free Report) . Constellation Brands agreed to buy additional 104.5 million shares of Canopy Growth for C$48.60 per share, expanding its stake in the marijuana company to 38% from the initial 9.9% acquired in November 2017. This means the company is going to make an investment of nearly $5 billion (C$4 billion) in the Cannabis producer. The offer price of C$48.60 per share represents a 51.2% premium to Canopy’s market price on Aug 14.

Additionally, Constellation Brands will receive 139.7 million new warrants of Canopy, which can be exercised in the next three years. These warrants, if exercised, will expand Constellation Brands’ ownership interest in Canopy to more than 50%, providing additional proceeds of about C$4.5 billion to Canopy.

Constellation Brands’ initial investment of nearly $5 billion marks the biggest investment in the cannabis space. These proceeds will help Canopy to bolster its position in the marijuana industry, providing funds to expand in about 30 countries that allow medical cannabis while also laying the background for growth in new recreational cannabis markets. This will mark a solid expansion from Canopy’s current presence in 11 countries.

On the other hand, this deal clearly confirms Constellation’s focus on building a global cannabis platform with Canopy. Per analysts, it also lays the foundation for Constellation to acquire full ownership in the marijuana company in the long run. As part of the deal, Constellation Brands will nominate four members for Canopy’s board, which comprises seven seats. The transaction, which is conditioned upon the receipt of shareholder approvals as well as required permission from the Canadian government and regulatory bodies, is expected to close by the end of October 2018.

Coincidentally, the closing period for the transaction is in sync with the estimated date of the legalization of recreational cannabis in Canada. Currently, the recreational use of cannabis is allowed in only a few countries. In the United States, recreational cannabis is permitted in nine states and the District of Columbia while it is an illegal drug at the federal level.

Through this investment, Constellation Brands expects to build upon the gains of $700 million recorded from its initial investment in November 2017. The company expects the latest deal to be accretive to its earnings, beginning fiscal 2021. However, the company stated that it will halt all M&A activities and share buybacks until it returns to 3.5x leverage target, which is likely to be reached about two years after the closure of the Canopy deal.

While Canopy is looking to expand in cannabis products in all channels, the two companies will refrain from selling cannabis products in markets, where it is not legally permitted.

Following the news, shares of Canopy Growth surged as much as 30.4% on Aug 15 while Constellation Brands fell 6.1% as investors remain concerned about the outcome of this massive investment. Overall, shares of Constellation Brands have moved down 8.1% in the last three months, underperforming the industry’s decline of 2.3%.



Further, the company’s soft earnings performance in the last-reported quarter has led to the downgrade of the stock to Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Investments in cannabis-infused beverages and other products have lately become an attraction for beer companies as they are looking to replenish their sales graphs, which are suffering due to the challenging beer industry dynamics.  Notably, beer players, including Molson Coors Brewing Co. (TAP - Free Report) and Anheuser Busch Inbev NV (BUD - Free Report) , reported sales declines in their recently reported second-quarter 2018 results as the companies’ flagship beer brands witnessed soft volumes.

Moreover, the beverage industry witnessed few more cannabis-related activities, including the joint venture between Molson Coors and Hydropothecary Corp., as well as Heinekein’s (HEINY - Free Report) launch of Hi-Fi Hops, a cannabis-infused sparkling water in California (where recreational marijuana is legal).

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