Constellation Brands’ (STZ) investment in Canopy Growth Corp. (CGC) of 104.5 million shares was based on “a big speculative bet on marijuana”, according to Moody Corporation’s Senior Vice President Linda Montag.
Montag wrote in her report, “There is significant uncertainty around the ultimate demand for cannabis and its derivative products, including cannabis-infused beverages. Legalization in many markets, including the US, also remains uncertain, as does pricing and regulatory dynamics in markets that have legalized. Potential liabilities or litigation could also arise.”
The investment is the largest of the cannabis industry so far.
Canopy immediately acquired proceeds of C$5 billion from the liquor giant, who saw an opportunity to enter the cannabis space amidst legalization. Rob Sands, CEO of Constellation Brands told Green Market Report last week of the acquisition. “Over the past year, we’ve come to better understand the cannabis market, the tremendous growth opportunity it presents, and Canopy’s market-leading capabilities in this space. We look forward to supporting Canopy as they extend their recognized global leadership position in the medical and recreational cannabis space.”
For Constellation, the investment represents an opportunity for diversification away from beverages and the U.S.; having an ownership stake in Canopy assures Constellation access to high-quality supply, production, and R&D. The partnership will represent an extension not only into cannabis beverages, but also edibles, vaping, and medicinal products.
Montag classifies the investment as “defensive play” against cannabis replacing alcoholic beverages in social settings.
Too Much Debt
In addition to the issue surrounding the potential for cannabis-infused beverages, Montag had serious concerns about the deleveraging for Constellation. She wrote that Constellation’s $4 billion investment to increase its share in Canopy Growth turns into a nearly 40% leverage, taking debt/EBITDA to the mid-to-high 4 times range from 3.8 times at the quarter ended in May. “We have previously said that leverage above 4 times could lead us to consider a ratings downgrade,” wrote Montag.
According to studies, alcohol consumption has dropped up to 15% in states where cannabis has been made legal. “Constellation will gain the opportunity to be involved from the ground up, and to take a leadership position in the space. Moody sees this investment as “the biggest opportunity for disrupting the alcoholic beverage business since the repeal of prohibition.”
For Canopy, the investment will allow expansion into the 30 countries that have medical marijuana laws. As a result of the announcement of the investment, Canopy Growth stock jumped to a high of $33 on the news before slipping closer to $30.