Could Smaller Pot Companies Be Targets After The Constellation – Canopy Deal?

Last week, beer and wine company Constellation Brands (NYSE: STZ) announced that it would be investing about $4 billion into marijuana producer, Canopy Growth Corporation, as it looks to get a head start in the market for cannabis-infused drinks. The investment, which marks the single largest deal in the cannabis space, has caused cannabis stocks to rally significantly, amid anticipation that other marijuana companies could see similar deals. There has been some deal-making activity prior to this, as well. Earlier this month, Molson Coors entered into a joint venture with Canadian cannabis producer, The Hydropothecary Corporation, to focus on non-alcoholic Cannabis-Infused Beverages targeted at the Canadian Market.  Below, we take a look at what these recent events could mean for the broader cannabis industry.

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Why There Is Interest In Marijuana Companies

The market for beer has been declining in the U.S., and liquor companies could be looking to offset this drag on their revenues by introducing cannabis-infused drinks. There appears to be a correlation between the decline in liquor sales and marijuana use in some cases. According to a joint study conducted by three universities, it was found that counties located in U.S. states where medical marijuana has been legalized, registered a 15% drop in monthly alcohol sales. Although marijuana based beverages won’t be introduced in the U.S. until the federal law is changed, it is possible that legislative changes could be imminent, potentially expanding the market for cannabis.  This could strengthen the case for liquor companies hedging their bets in the marijuana space. Separately, there is a possibility that Constellation (or any other well-funded cannabis producers) could acquire or invest in rivals using their cash holdings, as they look to boost production capacity without the hassles of licensing and regulatory issues, while scaling up distribution. Although larger companies in the cannabis space, including Aurora and Aphria, could be preferred by strategic investors, smaller companies such as the Cronos group, which has been expanding its production capacity, could also emerge as likely targets.

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