Constellation Brands: The Smart Way To Invest In Canopy Growth?

Constellation Brands' investment in Canopy Growth has been a significant development in the cannabis industry. In 2017, Constellation Brands, a US-based beverage company, acquired a 9.9% equity interest in Canopy Growth, a Canadian marijuana company. Despite Canopy Growth's lacklustre sales performance and net losses, Constellation Brands remains committed to its investment and has even increased its stake over the years. As of 2024, Constellation Brands owns approximately 37-38.6% of the cannabis business. The investment provides Constellation Brands with exposure to the cannabis industry, while also allowing Canopy Growth to expand globally and solidify its market position. However, the partnership has faced challenges, with Canopy Growth's share price struggling and the company incurring significant losses.

Constellation Brands' initial investment in Canopy Growth

Constellation Brands, a US-based beverage company, first invested in Canadian marijuana company Canopy Growth in 2017, acquiring a 9.9% equity interest. The following year, in 2018, Constellation invested $3.7-$4 billion in Canopy, increasing its ownership interest to 37%. In 2020, Constellation exercised warrants and boosted its stake in Canopy Growth to 39%.

Constellation's initial investment in Canopy Growth was driven by the company's desire to enter the cannabis market early and capitalise on the potential of cannabis beverages in the US market. However, the expected market growth did not materialise, and Constellation's investment in Canopy Growth resulted in net losses. By 2022, Constellation announced that it did not plan to invest additional capital in the Canadian cannabis operator and allowed its warrants to purchase additional Canopy shares to expire in November 2023.

In April 2024, Constellation Brands further distanced itself from Canopy Growth by converting its common shares into non-voting and non-participating exchangeable shares. This move eliminated the impact on its equity earnings and reinforced its intention not to deploy additional investments in Canopy Growth. Constellation's subsidiaries, Greenstar and CBG, now hold exchangeable shares that can be converted into common shares on a one-for-one basis. However, they do not intend to convert these shares until the US domestic sale of marijuana complies with relevant laws and regulations.

Canopy Growth's sales and losses

Canopy Growth has been experiencing financial losses in the short term as it focuses on dramatically expanding its operations and sales in the emerging recreational and medical cannabis markets in the US, Canada, and globally. In Q4 FY 2020, the company posted a net loss of CA-$1.3 billion and a slowdown in revenue growth. In Q3 2024, the company reported a net loss of $216.8 million, an improvement from a net loss of $259.5 million in Q3 2023. However, net revenue fell 7.5% year-over-year to $78.5 million.

Canopy Growth's gross profit, which it refers to as gross margin, grew by 439% year-over-year to $28.2 million in Q3 2024 due to a large decrease in the cost of goods sold. The company's Canada Cannabis segment, its largest source of revenue and gross profit, generated a gross margin of $11.1 million in Q3 FY 2024, an improvement from a $5.3 million gross loss in Q3 2023. However, revenue for this segment fell 16.3% year-over-year to $39 million.

The Rest-of-World Cannabis segment, which includes medical markets in Europe and Australia, generated a gross margin of $4.2 million in Q3 2024, up from a loss of $2.2 million in the previous year. Revenue for this segment rose by 80% year-over-year to $10.5 million.

The Storz & Bickel segment, which is involved in the production, distribution, and sale of vaporizers and accessories, generated a gross margin of $9.4 million in Q3 2024, a 2.9% increase from Q3 2023. Revenue for this segment, however, decreased by 8.7% to $18.5 million.

Canopy Growth's sales have been described as "lackluster", with the company reporting net revenue of CA$110.1 million for the period ended June 30, 2022, a 19% decrease year-over-year. During this period, the company also recorded a goodwill impairment charge of CA$1.7 billion and a net loss of CA$2.1 billion.

Despite these losses, Canopy Growth has made strides towards improving its financial performance. In August 2020, the company reported lower-than-expected losses for its most recent quarter, along with lower-than-expected sales. However, it managed to significantly lower its operating expenses year-over-year while increasing revenue over the same period.

In February 2022, Canopy Growth reported stronger-than-expected third-quarter revenue, with its third-quarter net loss narrowing to C$108.93 million from a loss of C$904.38 million in the previous year. The company's revenue fell to C$140.9 million from C$152.5 million a year ago, but this was still above analyst expectations of C$135.9 million.

Canopy Growth's financial performance has been impacted by its focus on expansion and growth in the cannabis market, as well as the evolving legal landscape surrounding cannabis legalization. Despite the challenges, the company has seen improvements in its gross margins and remains committed to its growth strategy.

Constellation Brands' continued commitment to Canopy Growth

Constellation Brands' commitment to Canopy Growth has been a long-term endeavour, with the former first investing in the Canadian cannabis company in 2017. The initial investment saw Constellation Brands acquire a 9.9% equity interest in Canopy Growth for $190 million, with the former citing the intention to gain exposure to the burgeoning cannabis industry. The following year, Constellation Brands further solidified its commitment by investing an additional $4 billion, bringing its ownership stake to 38.6%.

Despite Canopy Growth's financial struggles, with losses and share price declines, Constellation Brands has demonstrated its continued commitment by retaining its investment. In 2024, Constellation Brands reported a net loss of $1.1 billion, partly due to an impairment charge on its investment in Canopy Growth. However, the company's shares have shown resilience, with a decline of only 10% that year, outperforming the S&P 500 Index.

Constellation Brands' CEO, Bill Newlands, has expressed optimism about the long-term market opportunity in the legal cannabis market. He highlights Canopy Growth's pending deals with U.S. companies, such as Acreage Holdings and Wana Brands, positioning themselves for the future. The potential for the cannabis industry is promising, with analysts projecting significant growth in the global cannabis market until 2028.

Constellation Brands' involvement provides Canopy Growth with the financial resources to pursue global ambitions and expand its leadership position. It also grants them access to the consumer goods industry, enabling a better understanding of customer trends and brand positioning. In return, Constellation Brands solidifies its presence in a booming industry, offsetting potential declines in its wine, spirits, and beer segments.

The relationship between the two companies is symbiotic, with Constellation Brands exerting increasing control over Canopy Growth's operations. The appointment of David Klein, former CFO of Constellation Brands, as Canopy Growth's CEO in 2020, further underscores this influence. While Canopy Growth continues to face challenges, Constellation Brands remains committed to guiding the business and potentially expanding its U.S. presence if federal legalization occurs.

Canopy Growth's pending acquisitions

Canopy Growth has made several acquisitions and established partnerships with companies in the cannabis industry and beyond. Here is an overview of its pending acquisitions:

Acreage Holdings

Canopy Growth has a pending acquisition deal with multi-state operator Acreage Holdings, which is based in British Columbia but has a diverse portfolio of cannabis cultivation, processing, and dispensing operations in the US. The deal involves Canopy Growth purchasing 100% of Acreage shares for US$3.4 billion, but it is contingent on the legalisation of cannabis in the US. As of June 2024, Canopy Growth has exercised its option to acquire Acreage Holdings, making it a wholly-owned subsidiary upon closing.

Wana Brands

Canopy Growth has also purchased the rights to buy edibles maker Wana Brands, which it describes as the "#1 cannabis edibles brand in North America." The company has a presence in 12 states, with the potential to expand to 20 by the end of 2024. This acquisition is also pending, as it is dependent on changes in marijuana laws in the US. As of June 2024, Canopy USA, a subsidiary of Canopy Growth, has completed the acquisition of two Wana Brands business units: Wana Wellness, LLC, and The CIMA Group, LLC. The acquisition of Mountain High Products, another entity within the Wana Brands portfolio, is expected to close in the first half of fiscal 2025, pending regulatory approval.

Jetty

Canopy USA has also acquired Jetty, a California-based cannabis extract producer, as part of its broader expansion strategy.

Supreme Cannabis Company

In June 2021, Canopy Growth announced the completion of its acquisition of all issued and outstanding common shares of The Supreme Cannabis Company, Inc. ("Supreme"). This acquisition strengthened Canopy Growth's leadership position in the Canadian recreational market and enhanced its production capacity through the addition of Supreme's low-cost, scalable cultivation facility in Ontario.

Other Acquisitions

Canopy Growth has also made several other acquisitions to expand its global presence. These include partnerships with a pharma company in Spain, a subsidiary in Germany, and agreements with companies in Jamaica, Chile, Peru, Brazil, and Australia. In 2018, Canopy Growth acquired Annabis Medical, a distributor in the Czech Republic, and Daddy Cann Lesotho, a medical marijuana supplier in Africa. The company also established a partnership with the Beckley Foundation in the UK in 2019.

The potential for the cannabis industry as a whole

The cannabis industry is experiencing rapid growth and holds immense potential for investors. The global legal marijuana market is projected to reach a valuation of USD 102.2 billion by 2030, growing at a CAGR of 25.7% from 2024 to 2030. This growth is driven by several factors, including the increasing rate of legalization for medicinal and recreational use, the growing adoption of cannabis products for treating chronic ailments, and the launch of new products. As of April 2023, 38 states in the US have legalized marijuana for medical use, with 24 of those states also allowing adult-use recreational consumption.

The shift in public perception and government policies regarding marijuana has been significant. More than half of Americans believe that marijuana use should be legalized, and this support is reflected in changing political landscapes. The stigma associated with marijuana is rapidly diminishing as people become more aware of its medicinal benefits. This shift in perception has led to the exploration of legalization for medicinal purposes in several countries, including Belgium, England, France, Portugal, and Spain.

The cannabis industry's potential is further underscored by the interest and investments from established companies outside the industry. Constellation Brands, the parent company of Corona beer, invested $4 billion in Canopy Growth Corp., a Canadian pot producer, acquiring a 38% stake in the company. This move by Constellation Brands highlights the recognition of the cannabis industry's growth potential by major corporations.

The cannabis industry's growth is also driven by the diverse applications of cannabis across various industries. In addition to the well-known medicinal and recreational uses, cannabis is gaining traction in the consumer goods space, particularly in the form of cannabis-infused drinks and edibles. The appeal of cannabis-containing foods and the legalization of cannabis are rapidly rising due to the associated health benefits.

Furthermore, the cannabis industry is witnessing a high degree of innovation. Ongoing clinical trials are exploring the use of cannabis and its derivatives for treating various diseases, including cancer, Alzheimer's, Parkinson's, and other neurological conditions. The FDA and other associations have started accepting marijuana derivatives for prescription use, driving market growth.

In conclusion, the cannabis industry as a whole presents a compelling investment opportunity. The combination of increasing legalization, rising consumer demand, diverse applications, and ongoing innovations makes it one of the most promising sectors for investors today.

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