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Constellation Backs Canopy With Increased Stake

May 5, 2020

Constellation Brands has upped its stake in Canopy Growth. The drinks giant, which originally took a 9.9% interest in the Canadian cannabis company in the fall of 2017 before its landmark $4 billion investment in August 2018, has exercised additional warrants to increase its stake to 38.6%. The warrants, which date back to November 2017, were exercised at C$12.98 ($9.23) per common share for a total of approximately C$245 million ($174m). Constellation still holds a significant amount of unexercised warrants, which have the potential to put its ownership stake over 55% if used in full.

The move is significant on Constellation’s part, as it appears to show faith in an investment that has weighed on the company to this point. Canada’s recreational cannabis market has been slower to develop than expected and the capital investment required for cannabis production and manufacturing has consistently outweighed Canopy’s earnings, often topping $100 million a quarter. These problems have impacted Constellation’s own financials: in January the company logged a $534 million decrease in the value of its investment for its fiscal third quarter.

“While global legalization of cannabis is still in its infancy, we continue to believe the long-term opportunity in this evolving market is substantial,” said Constellation president and CEO Bill Newlands. “Canopy is best positioned to win in the emerging cannabis space and we’re confident in the strategic direction of the company under (former Constellation CFO) David Klein and his team.” Klein took the reins as CEO of Canopy Growth in January and vowed to impose discipline on the company’s spending.

The Covid-19 crisis has precipitated additional belt-tightening at Canopy, as the pandemic’s economic implications have introduced a new level of uncertainty into demand trends and consumer spending habits. Canopy is reducing its global footprint significantly, abandoning some operations in Africa, ceasing cannabis cultivation in Colombia, shuttering a facility in Canada, and suspending hemp operations in upstate New York. Between the global reduction and other Covid-19 related cuts, the company has eliminated nearly 1,000 employees in 2020.

Canopy Growth’s new leadership outlined its key priorities in an investor presentation in recent days, emphasizing a pivot to become a profitable, consumer-centric organization. The company continues to see massive upside in cannabis beverages, citing a recent poll that showed only 8% of respondents currently consuming cannabis beverages but 26% reporting an intent to purchase them in the future. By contrast, 52% of respondents said dried flower was their current preference, but only 33% said they intend to continue using it in the future. While Canada’s cannabis beverage market has been slow to evolve, Canopy’s Tweed Houndstooth & Soda brand is now on the market, and the company has plans to launch 10 cannabis RTDs—at 2 milligrams of THC per serving—as well as three mixers intended to be combined with non-alcoholic beverages.—Danny Sullivan

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