Constellation steps back from cannabis

Constellation Brands is stepping further back from the cannabis-infused drinks market and has signalled that it could withdraw completely.

Constellation Brands has declined to take up warrants over 139,745,453 common shares in Canopy Growth, the Canadian producer which has caused unending problems for Constellation since it took an initial CN$190 million stake in Canopy in 2017.

The rejection of the warrants means that Constellation’s stake in Canopy will fall to about 20.7% from a peak of 35.7%.

It will still hold CN$100.0 million of 4.25% promissory loan notes issued by Canopy which fall due for redemption next year.

Announcing the decision, Constellation said that it has “no other present plans or future intentions” that relate to Canopy.

“Constellation may from time to time dispose of common shares or other securities of Canopy or conduct other transactions, in the future, either on the open market or in private transactions.”

Significantly, while pointing to the potential of “other available investment opportunities” Constellation made no comment about further cooperation with Canopy.

Pointedly it said: “Depending on market conditions, general economic and industry conditions, Canopy’s business and financial condition, and/or other relevant factors, Constellation may develop other plans or intentions in the future.”

Constellation had increased its investment in Canopy to more than CN$4 billion and had taken seats on the Canadian group’s board, but last autumn it withdrew from those directorships and wrote down its investment by CN$1 billion.

That marked a significant distancing of Constellation from Canopy and now it will no longer even have prior notice of the cannabis group’s accounts before publication.

Shift of focus

For the past year, Constellation has reported its own financial progress “ex Canopy”, referring only to the beer, wines and spirits divisions.

These have made significant progress without being dragged down by the Canopy investment and it is speculated that if Constellation can release cash from its remaining Canopy holding, it will use it to fund expansion in those divisions.

Some analysts believe that Canopy is burning through about CN$600 million in cash per year and even if the US Federal government were to legalise cannabis consumption across the country, it would need a huge investment to gear up production and build distribution, even using Constellation’s extensive network.

But while it still holds 20% of Canopy, Constellation could remain an influential partner should legislation change.

Without Canopy, Constellation Brands predicts net sales growth of between 7% and 9% for this year, and for operating margins between 39% and 40%.

It has already announced expansion plans to meet rising demand in its the beer business, based on the Modelo and Corona brands.

Earlier this year Modelo Especial became the best-selling single beer brand in the US, eclipsing AB InBev’s Bud Light.

Constellation has also announced that it is launching a further $2 billion stock buyback programme to augment shareholder returns.

Related news

Burgundy 2023 en primeurs: cautious optimism

SWR: lighter bottles for entry level wines is 'the wrong message'

Ribera del Duero challenges 'out of date' perceptions in UK market