Corona Brewer Bets $4 Billion on Cannabis Startup
Corona brewer Constellation Brands Inc. STZ -6.10% is investing about $4 billion into Canadian marijuana grower Canopy Growth Corp. CGC 30.42% , one of the biggest corporate wagers on the potential global market for cannabis-infused drinks and other products.
Constellation, which also produces Robert Mondavi wines and Svedka vodka, has benefited from strong U.S. sales of its Mexican beer imports, Corona and Modelo. But overall beer consumption in the U.S. is in decline, as consumers abandon American lagers for wine, spirits and nonalcoholic drinks.
Cannabis is “the logical fourth leg” for the beer, wine and spirits company, giving Constellation a “total mood-modulation portfolio,” said CEO Rob Sands, whose family controls the company through its ownership of supervoting shares.
Over the past year, three big beer companies—Constellation, Heineken HEINY -1.08% NV and Molson Coors Brewing Co. —have announced development plans forcannabis-infused beverages in Canada or the U.S. Heineken’s Lagunitas brand launched a cannabis-laced, hop-flavored sparkling water in California in July.
Constellation said Wednesday it would spend 5.08 billion Canadian dollars (US$3.88 billion) to increase its ownership stake in Canopy to 38%. The deal gives Constellation the right to invest another US$3.4 billion to acquire a controlling stake. Canopy generated less than US$60 million in revenue in its most-recent fiscal year.
Shares of Constellation tumbled on the news, dropping more than 6% in Wednesday midday trading. The deal will add to Constellation’s already substantial debt load.
Constellation’s new deal follows an initial investment last year, when it took a roughly 10% stake in Canopy and said it would develop nonalcoholic, cannabis-infused beverages for Canada and other legal markets. The new partnership will include “a full suite of products,” Mr. Sands said, but the company won’t introduce those products in the U.S. until allowed by federal law.
Recreational marijuana use in Canada will be legal in mid-October, and edible and drinkable cannabis products are expected to be legalized there by 2019. Independent research firm Euromonitor International estimates that legal marijuana sales in 2018 will total US$7.5 billion in Canada and $10.2 billion in the U.S. where it is allowed for recreational use in nine U.S. states and Washington, D.C.
“This is really the first time anything like this has happened since Prohibition,” Mr. Sands said. Canopy will use the capital to build or acquire assets around the world, he said, noting that about 30 countries are currently considering legalizing medical marijuana.
Mr. Sands said he wasn’t motivated by the decline in beer consumption or concerned about the potential threat cannabis poses to alcohol sales. Beer drinkers have been shifting to higher-end options such as craft beer and Mexican imports, as well as to wine and spirits, all of which Constellation sells, he said.
Canopy, which was started in 2013, sells medical marijuana products—including dried flower, oils and capsules—in Canada, Germany and the Czech Republic and is preparing to sell medical products in several others. Meanwhile, it is set to launch recreational products in Canada in October.
Canopy and Constellation since last year have been exploring cannabis-infused beverage options including de-alcoholized beer and seltzer water, Mr. Sands said.
Research on cannabis’s impact on alcohol consumption so far has yielded conflicting results. A handful of big alcohol makers have begun investing anyway, on the grounds that marijuana is likely to be a growth engine at a time when alcohol consumption across the developed world is falling, partly due to health concerns.
Big American brewers in particular are under pressure as millennials cut back on drinking and when they do, increasingly opt for wine and spirits. U.S. drinkers chose beer just 49.7% of the time last year, down from 60.8% in the mid-90s, according to trade body the Beer Institute.
Gavin Hattersley, chief executive of Molson’s U.S. business MillerCoors, in May described cannabis as one of a number of “micro cuts” that were hurting beer, already suffering from the shift to wine and spirits. Molson Coors earlier this month said it is forming a joint venture with another Canadian cannabis producer to make nonalcoholic, cannabis-infused beverages for the Canadian market.
In the four states in which marijuana has been legal for recreational use for over three years, research firm Bernstein found that average beer consumption relative to the rest of the U.S. had climbed 0.9% after legalization.
By contrast, Cowen analyst Vivien Azer says her analysis of data since 2009 shows a consistent decline in U.S. per-capita alcohol consumption and an increase in reported cannabis incidence. A Cowen survey of consumers in North America found over 30% of cannabis consumers report “drinking a lot less.”
The Victor, N.Y.-based Constellation plans to buy 104.6 million shares of Canopy at C$48.60 each, a 51% premium from its Tuesday closing price in Toronto trading. Constellation will also receive warrants in Canopy that, if exercised over the next three years, would give it a more than 50% stake in the company. Constellation will also nominate four directors to Canopy’s seven-member board.
Constellation’s market value has surged to $39 billion since its $5.3 billion deal to buy U.S. distribution rights to Corona, other Mexican beers and a Mexican brewery from AB InBevin 2013. But the company is still paying down debt from that deal. It had $210 million cash and more than $9 billion in long-term debt as of May 31.
Constellation, conscious of its investment-grade credit rating, said it won’t engage in mergers, acquisitions or share buybacks for at least 18 months after the deal closes, giving it time to reduce its debt load. Mr. Sands said Constellation would quickly pay off the debt from the Canopy investment.