Big booze joins big pot

Photo: The Canadian Press

Alcohol giant Constellation Brands will invest $5 billion in Canopy Growth Corp. — the largest strategic investment in the cannabis space to date — which the marijuana producer says will help it scale up and fend off competition from established players in big pharma and booze who are hungrily eyeing the pot industry.

Canopy chief executive Bruce Linton called the infusion of capital "rocket fuel" for the Smiths Falls, Ont.-based licensed producer, enabling it to extend its global reach as more markets legalize cannabis around the world.

Canada will this fall become the second country in the world to legalize marijuana for recreational use, sparking a flurry of activity in the homegrown sector. But in the coming years, Canopy's competition will be the likes of "big pharma," and "packaged beverage," rather than Canadian cannabis companies, Linton told analysts on a conference call Wednesday.

"This about accelerating and getting way further out there before those other big names are in," Linton said. "Getting our products, staking our claims, having the leverage that we have now and moving up."

As part of the deal, the global producer of beer, wine and spirits will make Canopy its exclusive global cannabis partner.

Constellation Brands will own 38 per cent of Canopy under the deal, in which it will acquire 104.5 million Canopy shares at a price of $48.60 per share. Canopy shares were up as high as 30 per cent at $41.82 in morning trading on Wednesday but settled back at $40.11 in late morning trading.

The investment follows a deal last year that saw the Corona-beer maker acquire a nearly 10 per cent stake in Canopy for $245 million and included collaboration on the development of cannabis-based drinks.

Its chief executive Rob Sands called the deal a "powerful partnership" as markets for cannabis are "opening up much more rapidly than appreciated."

"This is an extremely exciting time to be part of what could potentially be one of the most significant global growth opportunities for the next decade," Sands told an investor conference call Wednesday.

The Constellation deal comes as other alcohol companies have also started honing in on the cannabis industry. Earlier this month, Molson Coors Canada entered into a joint venture with the Hydropothecary Corp. to develop non-alcoholic cannabis-infused products. As well, Heineken-owned Lagunitas Brewing Co. recently introduced a cannabis-infused hoppy sparkling water in California.

Constellation's investment on Wednesday is by far the largest strategic investment seen in the space to date, said Russell Stanley, an analyst with Echelon Wealth Partners in a research note.

"Cannabis is quickly becoming a truly global business... We view the Canopy/Constellation news as further proof that a global market opportunity awaits, with Canadian-listed companies well positioned to participate given their head start and superior access to capital," he said.

Linton said Wednesday the money would largely be used to position the licensed producer for international expansion opportunities as cannabis becomes legal in new regions. Priority markets include the United States, Europe and Latin America, he added.

"As we look around the world, we're going to be expanding production, we're going to be doing more research, we're going to develop more intellectual property... And we're going to be way more global," he told analysts on a conference call.

Canopy's target acquisition list exceeds $1 billion for international assets and non-cultivation assets in Canada, Linton said. The licensed medical marijuana producer doesn't intend to acquire any cultivation assets at home, as it is easier to build their own, but would be eyeing domestic assets such as bottling lines, he added.