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Canopy Growth names Constellation Brands veteran David Klein new CEO

Battered shares of Canopy Growth (WEED.TO)(CGC) rallied more than 13 per cent on Monday after the company named David Klein its new chief executive officer. The move strengthens the cannabis giant’s ties to its largest stakeholder, Constellation Brands. (STZ)

Klein previously held a number of senior leadership roles at Constellation Brands, and is currently executive vice president and chief financial officer at the Corona beer-maker. He will assume the top job at Canopy Growth on Jan 14, replacing the current chief executive Mark Zekulin. 

"Canopy Growth sits at the forefront of one of the most exciting new market opportunities in our lifetime," Klein said in a release Monday.

"Thanks to the efforts of [current CEO Mark Zekulin] and the entire team at Canopy Growth, no company is better positioned to win in the emerging cannabis market. I look forward to working with the team to build on the foundation that has been laid, to develop brands that strongly resonate with consumers, and to capture the market opportunity before us."

Klein, who is currently executive vice president and chief financial officer at Constellation and serves as Canopy’s chair, will assume his new role Jan. 14. (Constellation Brands bio page)

Canopy Growth has been looking for new leadership since July, when co-founder and co-CEO Bruce Linton was abruptly fired. Linton’s departure was widely seen as a result of Constellation Brands’ disappointment with lacklustre financial results during his tenure. The beverage company owns a 37 per cent stake in Canada’s largest cannabis producer.

Linton told Yahoo Finance that he believes Klein is the “perfect pick,” adding that he has the heart and the brains to lead the company successfully. He said he hopes Klein will prioritize Canopy Growth shareholders above all other financial stakeholders, including Constellation Brands.

“As long as his compensation structure, which I don’t know, is 100 per cent aligned only with Canopy. If he is still carrying some kind of variable comp (sic) tied to Constellation in this, unless everyone else who is a shareholder in Canopy has the same thing, you don’t have alignment,” he said.

New York-based Constellation Brands’ foray into the cannabis sector began in 2017 with a $245 million investment for a 9.9 per cent stake in Canopy Growth. In November 2018, the alcohol firm closed a massive $5-billion investment. 

The entrance of a blue chip American company into the famously volatile cannabis sector ignited a rally that swept shares of producers to dizzying valuations. Those stocks lived up to their reputation, crashing back to Earth shortly before recreational legalization in Canada. Canopy Growth shares have fallen 35.5 per cent year-to-date.

Klein, whose resume also includes roles at Xerox (XRX) and a New York-based bread company, will be tasked with stabilizing the company’s shaky financial performance following several quarters of losses. The company said his appointment comes after a “thorough recruitment process” overseen by a special hiring committee. Zekulin, one of the founding employees at Canopy Growth, will step down from the CEO role and resign his seat on the company’s board on Dec. 20.

“It has been an incredible six years at Canopy Growth, and I have witnessed the team and Company grow from five people in an abandoned chocolate factory, to thousands of people across five continents,” Zekulin stated in the news release. 

NEW YORK, NEW YORK - SEPTEMBER 23: Mark Zekulin, Chief Executive Officer, Canopy Growth Corporation, speaks onstage during the 2019 Concordia Annual Summit - Day 1 at Grand Hyatt New York on September 23, 2019 in New York City. (Photo by Riccardo Savi/Getty Images for Concordia Summit)

“Canopy today is positioned to win with the resources, infrastructure, team, and award-winning culture needed to succeed. It has truly been an honour to be part of building a unique, Canadian success story like Canopy, and I look forward to seeing the Company continue to evolve and grow under David’s leadership.”

Zekulin’s leadership of Canopy Growth was marked by challenging financial performance and a number of important milestones for the company. During his time as CEO, Canopy Growth launched an expansive vape, beverage and chocolate portfolio, and announced a joint venture backed by Canadian rapper Drake. 

Zekulin told Yahoo Finance Canada last month that “a handful of extraordinary candidates” were being vetted to replace him. Linton, his predecessor, told Yahoo Finance Canada in August that his choice would be woman with a background in the technology sector.

“The reason is the cannabis space for a whole bunch of reasons is very male-lead, male-dominated,” he said. “Tech is about scaling with competent people. And when you think about tech, you don’t think about ‘how do I win in New Jersey and New York.’ You think about how to win globally. And this is what this is about.”

Cowen alcohol and cannabis analyst Vivien Azer sees Klein’s appointment as “not entirely surprising,” given Constellation Brands’ growing influence on the company’s board. Mike Lee, another Constellation Brands alumni, joined as chief financial officer in February.

“Given the need for better demand planning and significant cost controls, we are very encouraged by the capabilities that we believe Klein brings to WEED, having worked for the best top line growth and most profitable beer company in the U.S,” she wrote in a research note on Monday morning.

Azer has an “outperform” rating on Canopy Growth shares and a price target of $30. 

Toronto-listed shares jumped 12.26 per cent to $27.75 at 10:59 a.m. ET. New York-listed shares climbed 13.51 per cent to $19.45 in pre-market trading at 8:31 a.m. ET.

CIBC analyst John Zamparo called Klein a “prudent choice” that underscores an ongoing shift away from Canopy Growth’s bold expansion strategy.

“We view the announcement favourably, as the stewardship from another seasoned Constellation executive should generate increased interest from institutional shareholders, and steer the company towards its goal of global industry leadership,” he wrote in a research note on Monday. “Mr. Klein’s one-year tenure as Canopy board member affords him a level of familiarity with the business and the industry, a key advantage.”

Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.

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