Constellation Brands Commits to Cannabis with Canopy Growth Move

Canopy Growth Corporation (CGC) stock rose 26% in early market trading as Constellation Brands (STZ) brings a multi-billion-dollar cash infusion to the company, setting the conditions for an acquisition spree.

The $5 billion CAD ($4 billion) from Constellation investment builds on an existing relationship with the medical marijuana company started in October 2017, when Constellation paid $245 million in exchange for 9.9% of the company.

Now that Canada has moved forward to legalize recreational cannabis, Constellation is increasing its commitment to the cannabis business.

"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," Rob Sands, chief executive officer at Constellation Brands explained in a statement. "We look forward to supporting Canopy as they extend their recognized global leadership position in the medical and recreational cannabis space."

The newest investment buys 104.5 million shares of the company for 38% of the company, making constellation the largest shareholder by a wide margin. The valuation of the company per the previous agreement stood at $2.47 billion CAD, about half of the new investment and well below the $13.2 billion CAD valuation the newest investment lends the company.

Canopy plans to use the investment to "ramp up in Canada" and become the dominant player in its domestic market as well as keep some money on the balance sheet for further acquisitions and expansion abroad, according to an earnings call on Wednesday.

"Our target acquisition list is over $1 billion," Bruce Linton, CEO of Canopy Growth, told investors on a call. "We're on acquisition number nine so far."

The newest investment buys 104.5 million shares of the company for 38% of the company, making constellation the largest shareholder by a wide margin. The valuation of the company per the previous agreement stood at $2.47 billion CAD, about half of the new investment and well below the $13.2 billion CAD valuation the newest investment lends the company.

Linton added that the company's scale on the back of the investment will allow it to outpace competitors domestically and position itself for international growth and further acquisitions and expansion to US and European markets.

Constellation's growing partnership with Canopy is indicative of a broader trend of alcohol producers warming up to cannabis as a way to grow. Last month, Wine & Spirits Wholesalers of America (WSWA) stated its support for each U.S. state legalizing cannabis if they introduce regulations, as reported earlier in Real Money.

As Canadian government relaxes marijuana regulations across the country, and relaxed attitudes to cannabis spread across developed markets, Canopy Growth's valuation, scale, and partnership with Constellation will be one to watch.

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