$4 Billion Constellation-Canopy Growth Deal Changes How Investors Should View Marijuana Stocks
It was the shot heard 'round the world -- in the marijuana industry, the beverage industry, and likely others. Fortune 500 alcoholic-beverage maker Constellation Brands(NYSE: STZ) is investing $4 billion in top Canadian marijuana grower Canopy Growth Corporation(NYSE: CGC).
This investment comes on top of the initial $191 million (245 million in Canadian dollars) that Constellation made in Canopy last year. Constellation will own 38% of Canopy, assuming it exercises its existing warrants.
What does this deal mean for investors? It radically changes how they should look at the cannabis industry and marijuana stocks, in general.
Image source: Getty Images.
Rocket fuel for Canopy
Canopy Growth CEO Bruce Linton said in the company's quarterly earnings conference call that the Constellation investment is "rocket fuel" for his company. That's a good way of putting it.
The deal certainly served as rocket fuel for Canopy Growth stock. Its shares soared more than 28% after the announcement of Constellation's significant investment.
Canopy's extra $4 billion in cash also provides fuel for the company's expansion strategy. The company now can move as quickly as it would like to in multiple markets. Linton said that Canopy already has a list of potential acquisition targets that exceeds CA$1 billion. He expects that list will grow.
The type of acquisitions that Canopy might make depends on the country, according to Linton. He mentioned the possibility of perhaps picking up a "down on their luck biotech." Canopy could also benefit from having its own bottling operations, assuming Canada opens up the market for cannabis-infused beverages next year.
Don't look for Canopy Growth to acquire any of its fellow Canadian marijuana growers. Canopy stated that its "Canadian platform does not require additional cannabis cultivation assets." But the news of the Constellation investment generated plenty of buzz for other Canadian marijuana stocks.
Aurora Cannabis' (NASDAQOTH: ACBFF) share price jumped 15% in early trading on Wednesday. Tilray(NASDAQ: TLRY) stock moved more than 10% higher. Aphria's (NASDAQOTH: APHQF) gain wasn't too far behind. Why? Constellation's $4 billion bet backs up what executives of several of these companies have been saying.
For example, Aurora Cannabis Chief Corporate Officer Cam Battley said in June that he's not worried about a supply glut in Canada because of the huge global opportunity that "not everyone has fully appreciated." The Constellation-Canopy deal affirms Battley's optimistic outlook.
Bruce Linton made an interesting comment in Canopy's conference call. He stated that he didn't think the ultimate competitors in the cannabis industry will be any of the current Canadian marijuana growers. Instead, Linton expects the industry will be dominated by big pharma companies or packaged-beverage companies.
What he didn't say -- but investors appear to be anticipating -- is that more of these external players could begin to move into the cannabis market. Molson Coorsforged a partnership with The Hydropothecary Corporation, but there haven't been any deals even close to the level of the one with Constellation and Canopy. That could change in the not-too-distant future.
Canopy Growth will probably begin spending some of its massive cash stockpile very soon. Linton said there could be strategic investments each quarter and hinted at the possibility of future U.S. expansion.
The company remains committed only to selling cannabis products in markets where it's legal at the federal level. However, Linton said there could be "mechanisms of action we can take" to enter the U.S. market. He added that he's "not keen to divulge where we're going."
Constellations' big bet on Canopy could also spur other big alcoholic-beverage companies to come off the sidelines. If they wait too long, Constellation could build a head start that's impossible to overcome. Aurora Cannabis, Aphria, and Tilray are likely to be top partnership candidates for other major companies hoping to hop on board the train before it's too late.
One thing is clear: Investors should take the cannabis industry seriously. Constellation CEO Rob Sands perhaps said it best when he noted in Canopy's conference call that cannabis is "potentially the most significant global growth opportunity for the next decade."
His company is betting $4 billion on that proposition. And it changes how investors should view marijuana stocks.
More From The Motley Fool
Keith Speights has no position in any of the stocks mentioned. The Motley Fool owns shares of Molson Coors Brewing. The Motley Fool has a disclosure policy.