Constellation transitions to passive role at Canopy Growth

Dive Brief:

• Marijuana grower Canopy Growth said it is consolidating all its U.S. cannabis assets into a single entity, called Canopy USA, that will better enable the company to “capitalize on U.S. cannabis market opportunities.”
• The company also announced that Constellation Brands, which owns about 35.7% of Canopy, intends to trade its existing common shares into new exchangeable shares. As part of the deal, the Corona brewer would keep its existing stake but no longer be allowed to nominate representatives to Canopy’s board or approve certain transactions. It also will no longer get Canopy financial results to review.
• Despite spending roughly $4 billion in Canopy, Constellation is still waiting to benefit from the investment. Earlier this month, it recorded a $1.1 billion writedown in the value of its investment in Canopy.

Dive Insight:

Proponents of marijuana have remained upbeat for years that the drug would finally be legalized in U.S. While nothing is imminent, there is at least some evidence that America is moving toward that goal. 

President Joe Biden announced earlier this month he had pardoned all federal marijuana simple possession offenses, and asked the Department of Health and Human Services to “review expeditiously” how it is classified under federal law. Should marijuana be legalized nationally in the U.S, it would allow early investors in the space like Canopy and Constellation to benefit from investments they have made in developing new products and adding growers.

“As the growth of the U.S. cannabis market continues rapidly at the state level, this strategy enables us to take control of our own destiny and capitalize on the once-in-a-generation opportunity,” David Klein, Canopy’s CEO, said in a statement. “This strategy and positioning are true differentiators, which we expect to enable our investors and brands to realize value in the near term while positioning Canopy for profitable growth and a fast start upon U.S. federal permissibility.”

In an interview with Bloomberg, Klein said his company will create a new entity, Canopy USA, to expedite its purchase of three companies — Acreage Holdings, Jetty Extracts and Wana Brands. Initially, it had planned to take control of them once the U.S. legalizes marijuana. The move will make Canopy profitable and allow it to create a U.S “house of brands,” he told the news service.

For Constellation, the transaction will turn the company into a more passive investor in Canopy. The New York-based maker of beer, wine and spirits will retain its investment and realize any potential upside while minimizing risk and volatility to its business, CEO Bill Newlands said in a statement. 

“This transaction and the surrender of our warrants are expected to eliminate the impact to our equity in earnings, mitigate risk to our organization, and further reinforce our intent to not deploy additional investment in Canopy aligned with Constellation’s previously stated capital allocation priorities,” Newlands said Tuesday.

Just a few weeks ago, he noted that even though the $1.1 billion writedown his company took was “clearly disappointing”, Constellation continues to stay optimistic about the prospect of legislation.