October 31, 2017

Constellation Brands,  the $42 billion name behind such consumer favorites as Corona and Modelo beers and Svedka vodka, has agreed to acquire a 10 percent stake in Canada’s Canopy Growth Corporation – a leading provider of medical marijuana, for $191 million.

Canopy Growth is traded on the Toronto Stock Exchange under the ticker WEED, and is the largest publicly traded cannabis company in the world with a value of about C$2.4 billion. Upon the announcement of this deal, Canopy saw its largest rally in about a year.

“We are thrilled to have the backing of such a well-established and respected organization such as Constellation Brands,” said Bruce Linton, chairman and chief executive officer, Canopy Growth Corporation. “We look forward to working with the Constellation Brands team to access their deep knowledge and experience in growing brands as we continue to expand our business.”

This subjectively huge deal marks the first time an alcohol company has decided to enter the legal marijuana space. As beer sales slow, and legalization of medical and recreational marijuana continues to gain steam, Constellation states that this deal, which will see the two companies partner on producing non-alcoholic cannabis-infused beverages, is part of the group’s “long term strategy to identify, meet and stay ahead of evolving consumer trends and market dynamics…”

Based in Victor, New York, Constellation said that it has no plans to sell legal marijuana in the U.S. where it remains illegal on the federal level, despite growing legalization occurring on the state level, saying it will refrain from doing so until it is legal “at all government levels.”

However, the group is not holding back on identifying and acting upon the vast potential for doing so on the Canadian market where the government is expected to legalize recreational marijuana use for people over 18 by next year.

This deal will not only position Constellation ahead of its rivals if federal legalization of marijuana is achieved in the U.S., but will act as a hedge bet for the group. Food Dive reports that cannabis poses a real threat to the beer industry – a statement reflected in the fact that 82 percent of adults stated that they would stop drinking beer if marijuana was legalized in their state, according to a survey conducted by IRI and CannaBiz Consumer Group, which also concluded that the legalization of recreational marijuana has the potential to snatch 7.1 percent of beer industry revenue.

Additionally, a Gallup poll released last week found that 64 percent of the U.S. population is in favor of lifting the ban on marijuana, reports the Chicago Tribune. And as state-by-state legalization marches on, at this point, 20 percent of the U.S. population may legally partake or use legal marijuana. It is evident trends such as these and the fact that the legal cannabis market is expected to reach a value of $50 billion by 2026, according to Cowen & Co. that have mainstream companies that are struggling with slowing sales turn their eye, and their capital investments toward the space.

The Mainstream Abides

Although Constellation is the first mainstream alcohol group to enter the cannabis space, it is not the first global-scale brand to do so. In June of last year tech, giant Microsoft announced it had entered into a partnership with cannabis industry-focused company KIND Financial – a provider of “seed to sale” software services for the legal cannabis production industry.

At the time, Matthew A. Karnes, founder of marijuana data company Green Wave Advisors told the New York TImes, “Nobody has really come out of the closet, if you will. It’s very telling that a company of this caliber is taking the risk of coming out and engaging with a company that is focused on the cannabis business.”

Although corporate America has been reluctant to commit to the sector due to the inconsistent legal status of marijuana across the country, and only certain smaller banks are willing to finance companies within the space, this partnership forged by Microsoft was a telling sign that a bonafide infrastructure and framework for the industry was indeed taking shape.

Within a month of Microsoft’s announcement, Jim Hagedorn, CEO of Scotts Miracle-Gro, announced his company’s plans to invest $500 million in the legal marijuana space by the end of last year.

Cannabis also has received increased investment attention in the form of fund formation, including the launch of Canna Groups launch of private equity fund Sugar Leaf Capital Fund I LLC in November of 2015, the $100 million MedMen Opportunity Fund in June 2016, and Green Acre Capital’s launch of Green Acre Capital Fund I in January 2017 – a new equity fund committed to investments in the legal cannabis sector in the Canadian, U.S., and international markets.

High Hopes

Constellation’s deal with Canopy is expected to close as soon as November, and under its terms, Constellation will have the option to increase its stake to 20 percent.

However, although Canada plans to legalize recreational marijuana next year, edible products and marijuana-infused beverages like those planned for production through this partnership will initially be limited, and will be phased into the market as the Canadian government acts to eliminate black market activity, Bruce Linton, Canopy CEO, told the Chicago Tribune, stating “This looks a lot like the new normal.”

-Lynda Kiernan