What Constellation Brands’ Massive Investment In Canopy Growth Corp. Means For Both Companies

by Trefis Team
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Shares in Canopy Growth Corporation (TSX: WEED, NYSE: CGC) jumped over 30% after a $4 billion (~CAD 5 billion) investment by alcoholic beverage giant Constellation Brands (NYSE: STZ) was announced. This heavy investment takes the share of the latter to 38%, while also providing further warrants that could take the stake to over 50%, from 9.9% previously, and makes it the biggest deal in the marijuana space till date. This news was not met favorably with investors of the liquor maker, on the other hand, whose shares tanked on the news of the over 50% premium paid to acquire the stake. With other beer makers entering the space, such as Molson Coors Brewing Co (NYSE:TAP) and Heineken, this deal helps to strengthen STZ’s first-mover advantage. For Canopy, this investment gives them the money needed to achieve their global ambitions.

We have a $47 price estimate for Canopy Growth Corp, which is slightly higher than the current market price. The charts have been made using our new, interactive platform. If you don’t agree with our analysis, you can click here for our interactive dashboard on Our Outlook For Canopy Growth Corp In FY 2019 (year ended March 2019) to modify our driver assumptions to see what impact it will have on the company’s revenues and price estimate.

Canopy’s International Expansion Key To Its Lofty Valuation

Canopy was an early mover in the Canadian and international marijuana market, which has helped it to become the biggest player in this field. In 2014, there were only a limited number of countries which had allowed cannabis usage in some form, including Canada, Israel, Czech Republic, Netherlands, and Uruguay. Since then, a number of other countries have relaxed their attitude to cannabis, and till date at least 20 additional countries including Argentina, Austria, Australia, Brazil, Denmark, Chile, Columbia, Germany, Greece, Israel, Italy, Jamaica, Lesotho, Mexico, Netherlands, Norway, Poland, Puerto Rico, South Africa, Switzerland, and Turkey have formally legalized medicinal cannabis access. Moreover, countries such as Belgium, Ireland, England, France, Portugal, Spain, and India are exploring the legalization for medical purposes. Such a prospect provides a tremendous avenue for growth, and enables Canopy to fulfill its lofty global aspirations.

Constellation’s $4 billion investment will help the pot company to bolster its leadership position as it gives them the funds needed to strategically build or acquire key assets in the almost 30 countries pursuing a medical cannabis program. The money is also likely to be invested in cannabis edibles space. The appeal of the edibles market is expected to increase at a fast pace once legalized in Canada (expected to happen next year), given its growth in the U.S. For example, in Colorado, the share of edibles and concentrates went up from 11% and 13% at the beginning of 2014 to 15% and 29% by the end of 2017. Furthermore, in California and Oregon, their combined share exceeds 35%. Constellation’s massive presence in the consumer goods industry will also help Canopy in better understanding customer trends and ensure better brand positioning.

For Constellation, on the other hand, such an investment enables them to solidify their presence in an industry that is poised to boom. The liquor giant, who is dealing with falling revenues in its wine and spirits segment, and is faced with a declining beer market in the U.S., has an opportunity to offset this drag on its revenues, by introducing cannabis-infused drinks. Moreover, in a joint study of three universities, it was found that counties located in U.S. states where medical marijuana has been legalized, a 15% drop in monthly alcohol sales was reported. Although these products won’t be introduced in the U.S. until the federal law is changed, it is highly likely legislative changes could occur soon, with the two companies placed in the perfect position to be ready from day one.

 

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