Canopy-Constellation II

We're going to need a bigger boat

According to a report this week by U.S. research firms Arcview Market Research and BDS Analytics,  global consumer spending on cannabis will hit $32 billion by 2022, triple current levels. The U.S. industry is gaining economic and political clout, employing more than 200,000 workers. That's more workers in the Cannabis Industry than there are dental hygienists in the entire US.

That's a big market, and will only get better. Constellation Brands (STZ), (think Corona Beer), agrees. The New York-based, Fortune 500 giant, doubled down on those numbers and this week upped its stake in Canopy Growth Corporation (CGC) from 9% to 38%. Not only that, they paid a premium for it.

Marijuana IndustryThey bought 104.5 million shares at C$48.60 per share for a total investment of C$5 billion. That represents a 40% premium on the current weighted-average stock price. They now consider Canopy Growth their exclusive, global, cannabis partner. Their original deal for the 9% stake in Canopy Growth, only confirmed and completed in October last year, was $200 million.

Rob Sands, Constellation Brand's CEO was quoted as saying, "this agreement supersedes the original deal and extends beyond beverages".

To get an understanding of how big this is, consider Canada as a whole this year.

Flush with cash and easy access to capital, Canadian cannabis companies have gone on a buying spree this year, with 48 deals recorded in the first half for a total disclosed value of C$5.2 billion, according to a recent report by PwC Canada, which attributes the spike in activity and value to the legalisation of adult-use cannabis on Oct. 17.

The latest Canopy-Constellation deal doubles that.

Control Premium

Constellation have the rights to another 139.7 million warrants. Just over half have an exercise price of C$50 per share and the rest could be exercised at the current weighted-average stock price at time of execution. If Constellation was to exercise all of them, it would take its ownership in Canopy Growth to over 50%. In addition, the deal gives Constellation 4 director nominations on the 7-seater Canopy Board. They have the control – if they ever wanted it. But for the moment they would be more than happy with backing the team.

"We see this as an endorsement of our execution to date," Canopy CEO, Bruce Linton.

All the money in the world

"This is rocket fuel," Bruce Linton said on the company's earnings call Wednesday. "We're going to be way more global." He also stated 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 now.

Fully go-time…now? Scary to think that there market leader feels they event even gotten out of first gear yet. Especially on the back of their earnings report this week.

They released their First Quarter 2019 results (for the period ending June 30, 2018)

  • Revenue of $25.9m (63% up on the corresponding quarter last year)
  • $3.6m (14% of revenue) was from Germany (2% of revenue in the corresponding quarter)
  • 26% of the revenue was in oils (19% in the corresponding quarter)
  • They also declared massive inventories (20,000kg of dried flower and 15,000l of oil) ready for the onset of the Adult use demand coming upon legalisation.)

"With an estimated 36% of the total supply committed to date to the provinces and territories, we have secured by far the deepest channel into the Canadian recreational cannabis market. Considering our substantial inventory, large cultivation footprint in production and the millions of additional sq. ft. of greenhouses and our new state-of-the-art distribution center that are ready and waiting for licenses, we remain very confident in our ability to succeed in capturing significant market share."

– Bruce Linton

The trend

CBD Beer Marijuana IndustryCanopy is without a doubt, best placed to take advantage of the coming onset of adult recreational use. Demand is going to completely dwarf supply, and Canopy has the most of it. With their recent announcement to purchase Hiku (the only 100%-focused Licensed Producer), they have secured a retail distribution footprint across Canada. They also have the greatest global reach, now operating on 5 different continents and with this much cash in the bank, can look to solidify those positions.

Just two weeks ago I wrote about how Molson Coors' entry into the market would not be the last. Although I was surprised by this deal (as was everyone) it is the greatest statement of intent – to date – that this industry is becoming very, very real.

Goldman Sachs acted on behalf of Constellation Brands and Bank Of America Merrill Lynch underwrote the financing. This is there first-time BOA have every underwritten a cannabis deal. That's A-level banking and finance on this deal – the biggest of its kind in the industry.

And this is all while the US – at the federal level – still remains illegal. And Canopy and Constellation have no intent of operating there just yet, because of it. But ready and poised they now are.

They have earmarked a significant portion of these funds to enter – all guns blazing – when the time is right and the legislature changes. And while Constellation know that right now, it's still federally illegal, they must know, and be assured, that the winds of change are blowing, strongly.

So, to recap…

A Fortune 500 company just invested C$5 billion into the largest player in the global cannabis industry. In doing so, they paid a 40% premium on the current share price and a 400% premium on the price they paid…only 9 months ago. Oh, and Goldman Sachs felt it was a good idea.

One thing's for sure. More money is coming and will be flowing…like wine.

And they told you money doesn't grow on trees.

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Mark Bernberg
Mark Bernberg

Mark Bernberg is a long-time cannabis investing enthusiast and founder of The Green Fund, Asia Pacific's preeminent media house, positioned at the forefront of the global cannabis industry.

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