Constellation’s choice: craft beer or cannabis?

What was all that about? The number three US brewer Constellation Brands could invest up to USD seven billion into Canada’s Canopy Growth, a nascent marijuana company. Is this a departure from Constellation’s playbook of buying craft brewers to increase overall revenues and sales?

Canopy Growth has little revenue and no profit, but the legalisation of recreational pot in Canada as of October this year could change that. Already, Canopy’s share is very high – as if massive growth is already a sure thing.

In October 2017, Constellation Brands took everybody by surprise when it acquired a nearly ten percent stake in Canopy Growth, by paying USD 191 million. This valued Canopy Growth at almost USD two billion. It was a controversial move, but Constellation’s CEO Rob Sands justified the investment by explaining that the company eventually expected nationwide marijuana legalisation in the US too.

In August 2018, Constellation hiked its initial investment to 38 percent, paying USD 3.88 billion. This represented a premium of over 50 percent to Canopy’s prior-day’s close on the Toronto Stock Exchange.

It was pointed out that Constellation receives other benefits from this deal, namely warrants that could increase its ownership stake to 50 percent and control of the board with four of seven seats. However, Constellation will face a debt pile of six times profits (EBITDA) if it invests all USD seven billion.

While this stake appears significant, Constellation will not change its colours and become a marijuana firm with ancillary interests in beer, wine and spirits.

In its past quarter, Canopy Growth reported CAD 25 million (USD 19 million) in revenues, versus USD two billion for Constellation Brands.

Still, Constellation hopes to make marijuana a “fourth leg of the business” behind beer, wine, and spirits.

Observers think this might be a more profitable route to growth than the plans of other Big Brewers to buy up craft brewers.

Take it as a sign that Constellation is placing big bets on cannabis. In August, the company which purchased craft brewers Ballast Point, Funky Buddha and most recently Texas’ Four Corners, announced a sweeping staff reduction at its sales team covering craft brands. US media say the lay-off might include as many as 60 people. Constellation’s import team for the Corona and Modelo brands will take over responsibility for the craft brands.