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Oct 30, 2017

'The first disruption': Canopy changes the cannabis game with $245M buy-in from Constellation

Canopy Growth CEO: Constellation team-up makes sense given current regulations on cannabis

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Canopy Growth’s partnership with Constellation Brands is just the first of many crossover moves to come for the cannabis market, according to the company’s CEO.

“From the day I began this company, I thought there was a likely sequence of crossovers. The first disruption was going to be to the alcohol industry,” Canopy’s chief executive Bruce Linton told BNN on Monday. “I think next up will be pharma… Whether or not the tobacco guys actually become guys that you’d want to own and create products that have a future? I don’t know. They’ve been around a little bit, but I’d say it’s at the back of the crowd.”

Linton’s comments come on the same day his company - Canada's largest licensed cannabis producer -  announced it is receiving a $245 million investment from Constellation, one of the world's largest alcohol conglomerates, in exchange for a 9.9 per cent stake in the Smith Falls, Ont.-based company.

The two companies said they'll work together to make cannabis-based drinks for distribution in jurisdictions where those products are legal.

Canopy shares (WEED.TO) soared on news of the partnership, closing 19 per cent higher on Monday at $15.22.

Linton said he believes the move will help keep Canopy ahead of the curve for a market he expects to open up.

Canopy Growth draws attention of Constellation Brands

Constellation Brands has announced that it will take a 9.9 per cent interest stake in cannabis producer Canopy Growth. Khurram Malik, head of research and partner at Jacob Capital Management, says Constellation is reserving a spot with Canopy, preparing for when more regulatory news comes down the pipeline from the U.S.

“Everything we’ve ever done at Canopy, we don’t wait ‘til the event is on to get ready for it. We prepare for it and do a number of things in advance,” Linton told BNN. “It’s very important that you lay down tracks so you can get some momentum on that path that you create. And, in the context of ‘adult beverages,’ when you look at Canada, every jurisdiction that governs us [is] at the [provincial] level, pretty much. We’re landing under the liquor control boards and a subset of that, which will be the cannabis authority.”

Analysts met the partnership with praise, with one calling the move a “game-changer.”

“We see this transaction as a game-changer for Canopy, as well as the industry at large,” wrote Beacon Securities Analyst Vahan Ajamian in a report to clients.

“We suspect more alcohol companies may look to accelerate plans to enter the industry — as well as pharmaceutical and tobacco companies.”

One company that isn't rushing into the cannabis space, however, is Molson Coors (TPXa.TO). 

"At Molson Coors, we understand beer very well, and the responsible connections of alcohol with work, play, family, and life as a whole.  Cannabis is much less well understood," the company told BNN via email. 

"While we continue to monitor developments in the U.S. and Canada, we’ll leave it to policy makers to figure out those hard questions with respect to cannabis.  In the meantime, we’re focused on our portfolio of beer and cider brands.”

Under the terms of the agreement, Constellation will receive 18,876,901 Canopy shares priced at $12.98 each, along with warrants to purchase the same number of shares at the same price.

Linton added that the companies are a good fit for one another on a cultural level, in addition to making financial sense.

“The match with the Canopy world was very good on a cultural level,” he told BNN. “When you put the capital in, you have to think about how we’re going to aggressively grow and spend and that capital is just common shares coming in, and we’ll build our business as we think is appropriate.”

 

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