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Why Did Constellation Brands Smoke the CEO of Its Big Weed Investment?

MyWallSt Staff, The Motley Fool

This article was first published by MyWallSt.

Last week, the founder and co-CEO of Canopy Growth (NYSE: CGC)Â -- the world's largest publicly traded cannabis company by market value -- was fired by his board.

On Wednesday, a press release published by the company said that founder Bruce Linton would "step down" from his roles as co-CEO and board member effective immediately. However, in an interview with CNBC later on in the day, Linton said that "stepping down might not be the right phrase" and that he was "terminated."

Cannabis bud on a plate

Linton placed the blame for his firing on Constellation Brands (NYSE: STZ), the company that took a 38% stake in Canopy back in November 2018 with a $4 billion investment. Constellation Brands is the third-largest importer of beer in the U.S. and is the owner of iconic brands like Corona and Modelo.

So why did Constellation want to pull the pin on Linton?

Big losses

Canopy Growth is one of the biggest names in the North American cannabis industry, becoming the first pot company to list on the Toronto and New York stock exchanges and the first to surpass a $1 billion valuation.

Along with his co-CEO and company president Mark Zekulin, Linton was at Canopy Growth (originally called Tweed) from the very start in 2012. The company has since managed to ride on the growing wave of recreational marijuana use in North America -- not least with the complete legalization of cannabis in Canada in October 2018 -- with its share price growing by more than 550% in the last two years.

However, when Canopy reported its fourth-quarter earnings a few weeks ago, overall net losses for the company came to 323.4 million Canadian dollars ($247 million) -- more than three times what analysts had expected.

Linton remained unabashed by this performance, stating on the call with analysts that the CA$93.1 million in stock-based compensation reported in the quarter -- amounting to just over half the company's operational losses -- was a good thing.

"If we had zero stock-compensation loss, we would have a much lower loss and a much worse company," Linton said.

The company also said the large loss was "reflective of the investments made in fiscal 2019 sales and marketing, and general and administration costs."

Linton added, "With more product formats coming to the Canadian market later in the year, we are working hard to ensure that we are ready to hit the ground running with products, formats, and brands that Canadians trust."

This loss took a big chunk out of Constellation Brands, too, with the company stating that its share of Canopy Growth's fourth-quarter losses was $106 million, or $78.2 million after including tax benefits.

After the call, Constellation CEO William Newlands said the company was "not pleased" with Canopy's recent results and that they would be "working with Canopy almost on a daily basis to ensure that we are all focused on the right things."

As we've since seen, getting rid of Linton was clearly part of Constellation's effort to right the ship.

A tough industry

Despite its growing acceptance, the cannabis industry still remains a volatile and fragmented one.

Under Linton, Canopy embarked on quite a large acquisition spree, including a recent agreement to buy Acreage Holdings -- a company with extensive cannabis cultivation, processing, and dispensing operations -- for $3.4 billion once the United States legalizes the production and sale of cannabis. This is part of the company's wider strategy to increase its production, distribution, and research footprint through acquisitions and investments ahead of what it believes to be more and more new markets opening up globally.

Though Linton was apparently instrumental in these expansion deals, it seems like Constellation -- which have four seats on Canopy's board -- thought that Linton was not the man to lead the company into the next stage of its future. To tackle such a multibillion-dollar potential, Linton's eccentric attitude and cavalier approach might have been a little too much of a risk for Constellation, especially when its own bottom line was being harmed.

Though Canopy's strategic direction does not look likely to change under its new sole CEO Mark Zekulin (though he appears to be just an interim solution), investors can probably expect to see a more disciplined and controlled approach under changed leadership.

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MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in Constellation Brands. Read our full disclosure policy here.


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