- Constellation Brands exercised 18 million warrants to buy shares of Canopy Growth for C$245 million ($173 million), increasing its ownership to 38.6%, the companies announced in a release. The warrants were originally issued in 2017 and represented roughly 5.1% of Canopy's common shares.
- Constellation now indirectly holds 142.25 million common shares of Canopy, 139.75 million warrants to buy common shares and C$200 million ($142 million) in senior notes. If Constellation exercised all remaining warrants and notes, it would own about 55.8% of common shares of Canopy Growth.
- "While global legalization of cannabis is still in its infancy, we continue to believe the long-term opportunity in this evolving market is substantial," Bill Newlands, Constellation's CEO, said in a statement.
Even though Constellation's big bet on Canopy Growth hasn't paid off in its earnings yet, the company remains confident about its potential and is investing even more money as a result.
Constellation was one of the first major alcohol companies to jump into the budding cannabis industry. The marketer of Corona and Modelo first acquired a 9.9% minority stake in the marijuana company for $191 million in 2017 and then made a major investment a year later when it spent an additional $3.9 billion to up its stake in Canopy. But so far, Canopy Growth has weighed down Constellation's earnings.
Facing losses, Constellation has obtained more control over the cannabis company. Constellation nominated four directors to Canopy's seven-member board after it made its major investment. Then Canopy's co-founder Bruce Linton was fired from his role as co-CEO, claiming he was forced out by Constellation. For his replacement, Canopy tapped David Klein, who was Constellation's chief financial officer.
Klein, who started as CEO in January, said in the release "the additional investment validates the work" the cannabis company has done since Constellation's initial investment in 2017. He also said it strengthens Canopy's ability to pursue market opportunities in Canada, the U.S. and other global markets.
Although it is still illegal nationwide in the U.S., Canada started allowing some cannabis-infused items, including edibles, beverages, topicals and extracts, to be sold in stores last December. But Canopy has had a slow start in the new market. In January, Canopy said it hadn't finished scaling up its cannabis beverage facility in Smiths Falls, Ontario, for commercial production and would miss its previously announced deadline to launch the products. But in March, Canopy Growth’s Tweed brand started to release its first cannabis-infused drink.
Now could be a good time for Canopy to scale up its cannabis offerings. As quarantines and lockdowns occur around the globe, sales of cannabis-infused foods and beverages are skyrocketing. A report from Headset found cannabis-infused beverage sales jumped 14% and edibles increased 28% in the U.S. from March 7 to March 31 compared to the first 10 weeks of 2020.
Constellation has remained optimistic about Canopy Growth despite the challenges and these additional shares shows that confidence even more. During Constellation's fourth quarter earnings call, Newlands said a range of Canopy's new cannabis-infused beverages are "awfully good" and "game-changers."
The management shakeup last year was indicative of the fact that Constellation was not happy with how its investment in Canopy has gone so far. With more than $4 billion invested, Constellation remains in it for the long haul despite early struggles. If the brewer decides to exercise all remaining warrants and notes, it would own more than half of Canopy, giving it greater control over how the company is run and the business decisions that are made.
As it works to release new products, Canopy has restructured its operations. The cannabis company laid off or furloughed almost 1,000 employees from its Canadian, U.K. and U.S. offices in recent months amid the pandemic, Forbes reported. In recent months, Canopy also has faced a multi-million dollar write down and closed greenhouses.
The company ceased operations in several regions, including Africa, Latin America and the U.S., to balance supply and demand. In the U.S., the company said an excess of hemp produced in 2019 was the reason for ceasing operations. Even though reports have shown that CBD is entering products at a rapid pace in the U.S., federal regulation has remained a gray area.
Since Canopy is cutting significant costs and laying off workers but still developing new products, Constellation seems to think its high expectations for the cannabis company could still come true. Earlier in the year, Constellation said it didn't plan to make additional cash contributions to Canopy beyond exercising its warrants, Reuters reported.
Whether or not Canopy's restructuring moves and product launches work out will likely determine if Constellation decides to acquire more of Canopy, sell existing shares or watch how its $4 billion investment plays out. With the future of the cannabis industry in the U.S. far from certain, it remains a big bet for Constellation.