Constellation Brands takes dominant stake in cannabis market via US$3.8 billion investment in Canopy Growth

The growth of the medical cannabis industry is attracting not only biotech and pharmaceutical companies, but also retail and consumer-focused popular brands aiming to court consumers towards life’s finer indulgences.

Constellation Brands (NYSE: STZ), the maker of Corona beer, has said it will spend US$3.8 billion (A$5.25 billion) to boost its stake in Canadian cannabis company Canopy Growth (NYSE: CGC).

The US giant reeled in a US$200 million stake in Canopy last year as part of what market commentators said would be a prelude to Constellation producing a non-alcoholic cannabis-based beverage.

There were also rumours circulating of plans for an alcoholic variety of cannabis-infused beers, although the company remained tight-lipped on any firm plans.

However, given that Constellation owns a big wine business as well spirits businesses SVEDKA vodka and Casa Noble tequila, the deal indicates that the retail giant sees cannabis-based products as a potential money-spinner, in part precipitated by the softening of existing government legislation on cannabis in North America.

Furthermore, Constellation could potentially up the ante even further if it decides to exercise an existing option that could take its ownership beyond 50%, thereby leaving the beverage manufacturer with a controlling stake in Canopy.

Market impact

News of Constellation growing its presence in medical cannabis helped to push publicly-traded pot stocks up across the board with the likes of Cronos and MedMen Enterprises rallying strongly.

Canopy shares surged more than 25% on the back of the overnight news which further highlights just how in vogue medical cannabis companies currently are, whether they be Canadian or Australian-based. Both markets are undergoing strong tailwinds, aided by strong consumer demand and thawing government regulation.

At market close in Toronto yesterday, Canopy Growth shares were trading at C$42.20 per share, up 31% on the day.

“This could potentially be one of the most significant global growth opportunities for the next decade,” said Constellation CEO Rob Sands.

“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,” said Mr Sands.

With countries such as Canada, the US, Germany, the Netherlands and Australia leading the way in promoting the gradual legalisation of cannabis, Constellation could potentially be vying to create tomorrow’s “cannabis-based alcoholic beverages” according to Canopy Growth CEO Bruce Linton.

In an interview with US news agency CNN, Mr Linton mentioned the possibility of Constellation and Canopy developing a “drink with no calories that can help fight depression”.

Legalised medical cannabis commerce

As it stands, existing legislation leaves allows every US State to make its own legislation regarding what degree cannabis is criminalised and regulated.

However, there are growing expectations that eventually most, if not all, US States will eventually legalise cannabis, according to Wells Fargo market analyst Bonnie Fargo.

This forecast is in large part based on the fact that the US has quickly proceeded from complete criminalisation to recreational use of cannabis being made legal in 9 states (Alaska, California, Colorado, Maine, Massachusetts, Nevada, Oregon, Vermont, Washington and the District of Columbia), and decriminalised in another 13 states including the US Virgin Islands.

Under current US law as mandated by the Controlled Substances Act passed in 1970, cannabis is classified as a “schedule 1” substance, determined to have a high potential for abuse and “no accepted medical use”. This adjudication has created multiple difficulties for both users and law enforcement personnel who often face double-standards in how drug users are treated. Both recreational users and medical users are being judged the same way by archaic laws although state laws do provide some rest bite.

At the state level, policies regarding the medical and recreational use of cannabis vary greatly, and in many states conflict significantly with federal law.

For the time being, Constellation says it will not offer a drinkable cannabis product across the US before legalisation is assured nationwide – although Canadians could be the first people on Earth to sip cannabis-infused beer in the near future given Canada’s accelerated cannabis legalisation schedule

As further indication that the beverage and cannabis industries could potentially become inescapably intertwined – California-based Lagunitas Brewing announced the launch of a cannabis-infused sparkling water to be sold in select locations around California last month.

The news is significant because Lagunitas is owned by leading brewer Heineken.

Heineken is a global giant with over 165 breweries in more than 70 countries. It produces 250 international, regional, local and speciality beers and ciders and employs approximately 73,000 people. Its annual beer production is around 180 million hectolitres with global revenues of around €20 billion (A$31 billion) per year.

In addition, last month Bloomberg reported that Molson Coors was in talks with several major Canadian cannabis companies, including Aphria and Aurora Cannabis. This is following this month’s news that its Canadian arm would make cannabis-infused drinks with Hydropothecary Corp. Another brewer, Anheuser-Busch (NYSE: BUD) has also pursued cannabis market deals.

With Constellation and Heineken dipping their toes in the water, these initial deal between brewers and cannabis companies could be just a sign of things to come for the sector.

Canopy Growth CEO Bruce Linton told reporters that he is targeting C$1 billion in overseas acquisitions over the next 6-12 months and that the Constellation deal “marks the end of the warm-up in our sector. It’s fully go-time,” says Mr Linton.

Canada was one of the first countries in the world to approve the use of medical cannabis in 2001 and has tabled plans to fully legalise the recreational use of cannabis by the end of this year.