Moody's Archives - Green Market Report

Anne-Marie FischerAugust 21, 2018


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.


William SumnerAugust 15, 2018


Constellation Brands (STZ), best known as the distributor for Corona beer, is doubling down on its investment in Canopy Growth Corporation (WEED) in what some are calling one the largest investments in cannabis history. On August 15, 2018, Constellation announced that it would acquire 104.5 million shares of Canopy, increasing its stake in the company to 38 percent. At a price of C$48.60 per share, the value of the investment totals to approximately C$5 billion.

Additionally, Constellation will receive 139.7 million new purchase share warrants, which are exercisable over the next three years. Should Constellation exercise all existing and new warrants, it would increase its ownership of Canopy to 50 percent. As part of the agreement, Constellation will nominate four out of seven directors to Canopy’s Board of Directors, effectively seizing control of the board. Canopy founder, Bruce Linton, will remain as board Chairman and Canopy will continue to be led by its existing management team.

Canopy will use Constellation’s investment to strategically acquire and build critical assets in the United States, so long as it does not violate federal law, and the nearly 30 countries with federally legal medical cannabis programs. Canopy will also begin to lay the groundwork in those countries for future recreational cannabis markets as well. So far, the reaction within the cannabis industry to the investment has been mostly positive.

Beth Stavola, president and founder of MPX Bioceutical Corp. (MPX), said that the investment is a telltale sign of there direction in which the cannabis industry is headed.

“These alcohol and tobacco companies are starting to better understand the cannabis industry and the opportunity for large-scale growth,” said Stavola. “Mood modifying beverages for socialization is a natural segway for their businesses. As people continue to move toward a more healthy lifestyle and recognize some of the negative effects that alcohol may have on the body, I think we are only going to see this trend continue and get stronger.”

Mike Parmar, manager of investor relations for Isodiol International (ISOL), congratulated Canopy on its investment from Constellation, stating that the infused cannabis beverage markets “is poised to take another significant leap forward.” Canopy Growth is Isodiol’s Canadian licensing partner.

Despite the fear that Constellation’s investment would lead to greater market consolidation, Caliva founder Dennis O’Malley thinks that there is still plenty of opportunity of those in the cannabis industry.

“We believe there is a major consumer shift from alcohol to cannabis and that the Budweiser of cannabis has not yet been created,” said O’Malley. “There is a massive opportunity to innovate on form factor, dosage, and formulations in cannabis beverages to meet the fast-changing consumer demands.”

Linda Montag, a Senior Vice President at the financial services company Moody’s, was more circumspect, characterizing the investment as an expensive gamble for Constellation.

“Constellation’s investment in Canopy is a large bet at a very rich price, which can only be justified if the company proves that it can benefit from the changing environment for cannabis in Canada and beyond,” said Montag.”Constellation’s acquisition appetite has long been a rating consideration, but the deviation from its core beverage alcohol business into an entirely new space introduces potential new risks along with opportunities.”

Jack SmithMay 9, 2018


A new report from Moody’s highlights the impact that legalized marijuana could have in the U.S. and Canada and the implications for other recreational substances, such as alcohol could be damning.

Moody’s estimates that marijuana could replace alcohol “on some occasions,” but spirits makers aren’t sitting on their laurels. Beer maker Constellation Brands (NYSE: STZ) purchased a 9.9 percent stake in Canopy Growth, a Canadian cannabis company. Additionally, Scotts Miracle Gro (NYSE: SMG) and leaf tobacco company Alliance One International have both acquired or invested in cannabis-related companies.

In the report, Moody’s notes that the legalization of marijuana could impact tax revenue from alcohol and potentially create “modest downward pressure on the use of pharmaceutical products,” especially those used to treat pain, anxiety, and depression as marijuana would theoretically replace them for treatment.

The negative effect would be felt greater at smaller pharmaceutical companies, particularly those with nascent drug pipelines, Moody’s says.

“Some small, unrated pharmaceutical companies are developing products based on the chemical cannabidiol, with one product advancing to the FDA review stage,” said Michael Levesque, a Moody’s Senior Vice President. “Thus far, large, traditional pharmaceutical companies haven’t invested heavily in cannabidiol, but that could change if smaller drug makers develop a market for these products.”

There is uncertainty about how the U.S. tobacco companies would enter the sector if and when marijuana is legalized at the federal level. Altria (NYSE: MO) and Vector Group (NYSE: VGR) have seen cigarette smoking on the decline for several years and there remain several questions about heated tobacco products and their long-term viability.

Still, the legalization is likely to have some modest positive impact on tax revenue, especially for the areas where it’s already legal.

“For US states and local governments that allow retail sales of marijuana, the related tax revenue is marginally credit positive,” said Grayson Nichols, a Moody’s Vice President-Senior Analyst in a press release. “Even for states with mature industries, such as Colorado, and large states like California expected revenue will remain only a small share of annual general fund revenue, given the limited opportunities for significant market expansion.”

In the U.S., 29 states have legalized some form of marijuana use. Nine states, including the District of Columbia, allow it to be used for recreational use, though it is still illegal at the federal level.

Canada is expected to legalize marijuana across the entire country sometime this summer. However, recent industry reports have noted that Prime Minister Justin Trudeau and his team could push that back to the fall, as opposed to July, as had been previously thought.

As with the U.S., Moody’s notes its difficult to anticipate how legalization would impact tax revenue in Canadian provinces.

“Given Canadian provinces’ limited experience with legalization, competitive pressures and calls to offset the costs of increased policing, we anticipate limited fiscal gain from legalized marijuana,” observed Michael Yake, a Moody’s Vice President – Senior Credit Officer. “On the other hand, legalization has the potential to reduce judicial burden, boost employment and offer a new revenue stream for First Nations populations. Suffice to say, if passed, the transition to adopting legal cannabis is expected to be complicated in the medium-term.”

That uncertainty has impacted the share price of many Canadian-based cannabis companies, including those in the Green Market Cannabis Index.

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