Constellation Brands is upping its bet on the cannabis industry, announcing an additional $4 billion stake in Canopy Growth on Wednesday.
The maker of Corona and Modelo took a 9.9 percent stake in the Canadian cannabis company in Oct. 2017, which included the option for future investments, giving Constellation a first toehold in an industry the brewer said it expects to soon be legalized across the U.S.
With this latest investment and the execution of some warrants, Constellation says its stake will become 38 percent of Canopy. Additionally, Constellation will receive 139.7 million in warrants for up to $5 billion in additional funding, which can be exercised over the next three years. If utilized, Constellation could raise its total stake in Canopy to more than 50 percent.
“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,” Constellation Brands CEO Rob Sands said in a statement.
“We think the premium paid as well as the size of [Constellation’s] investment reflects the long-term attractiveness of the global cannabis opportunity,” Cowen analysts said in a note Wednesday. The firm says Constellation’s expectation for the deal to be accretive by fiscal year 2021 is eno adding that it is encouraging, as well.
Shares of Canopy Growth surged 50 percent in premarket trading from Tuesday’s close of $24.62 per share. Constellation said it is acquiring the new stake at average prices which are 51 percent higher than Tuesday’s close.
Canopy Growth is Canada’s largest medical marijuana producer but took a hit after its first earnings report as a public company in the U.S. The beverage maker will nominate four directors to Canopy’s seven-member board, although Constellation expects Canopy to continue to operate independently out of Canada.
Canopy CEO Bruce Linton shrugged off concern from investors that Canadian marijuana is overvalued, saying Canopy Growth is focused more on cannabis as a product, than cannabis as a commodity.
In Canada, “by 2020 or 2021, there will be too much cannabis produced. If I’m still selling primarily an ingredient, I have completely dropped the ball. You want to transform it,” Linton told CNBC on June 28.