Constellation Brands (NYSE:STZ) is set to purchase about $5 billion worth of Canopy Growth Corporation (TSX:WEED) stock
SmallCapPower | August 17, 2018: Canopy Growth Corporation (TSX:WEED), a leading diversified cannabis company, and Constellation Brands (NYSE:STZ), a major alcohol beverage company, announced on Wednesday an important strategic partnership between the two companies, which is aimed at positioning Canopy Growth as the global leader in cannabis production, branding, intellectual property and retailing. Constellation Brands will increase its ownership stake in Canopy Growth by acquiring 104.5 million shares directly from Canopy Growth. This will lead to Constellation Brands having a ~38% ownership stake in Canopy with the exercising of the existing Constellation warrants.
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Constellation Brands is buying the new shares at C$48.60 per share, a 37.9% premium to Canopy Growth’s 5-day volume weighted average price of the common shares on the Toronto Stock Exchange, and a 51.2% premium to the closing price on August 14, 2018. Further, Constellation Brands will receive additional warrants of Canopy Growth, which would provide for at least an additional C$4.5 billion to Canopy Growth if exercised.
Through this transaction, Canopy Growth will have ~C$5 billion (US$4 billion) to strengthen its leadership position in the global cannabis industry. Canopy Growth will utilize this fund to strategically build and/or acquire key assets needed to establish global scale in the nearly 30 countries via federally permissible medical cannabis program as well as rapidly laying the global foundation needed for new recreational cannabis markets. Constellation Brands’ investment in Canopy Growth is the largest investment to date in the marijuana space. The transaction is subject to customary closing conditions, including Canopy shareholder approval and applicable Canadian government and regulatory approvals, and is expected to close by the end of October 2018.
This partnership will be beneficial to Canopy Growth as Constellation Brands has in-depth understanding of consumer trends and shifting preferences and established capability to translate those insights into distinct brand positioning that make strong connections with consumers and promote brand loyalty.
Constellation Brands CEO Rob Sands said, “Through this investment, we are selecting Canopy Growth as our exclusive global cannabis partner. Over the past year, we’ve come to better understand the cannabis market, the tremendous growth opportunity it presents, and Canopy’s market-leading capabilities in this space. We look forward to supporting Canopy as they extend their recognized global leadership position in the medical and recreational cannabis space.”
This move could prompt a company such as Molson Coors Brewing Company (NYSE:TAP) to enter into a similar agreement. Molson Coors has already announced an agreement to form a Joint Venture with The Hydropothecary Corporation (TSX:HEXO) to pursue opportunities to develop non-alcoholic, cannabis-infused beverages for the Canadian market following the legalization of consumable cannabis, which is expected to be legally permissible in Canada in 2019.
Canopy Growth trades at a market capitalization of C$9.31 billion with price-to-book multiple of 7.27x. This investment could enhance Canopy Growth Corp’s valuation in the near term.
Disclosure: Neither the author nor his family own shares in any of the companies mentioned above.
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