Gates OpeningA bold move: Canadian cannabis giant Canopy Growth sells stake to American brewer The deal comes with the Canadian government steaming towards the legalization of recreational cannabis by next July Medical marijuana production at the Aphria greenhouses in Leamington.Postmedia News Geoff Zochodne Geoff Zochodne October 30, 2017 6:12 PM EDT Filed under Investing Comment Facebook Twitter Email More U.S.-based beverage giant Constellation Brands Inc. is buying up to 20 per cent of Canopy Growth Corp. in a ground-breaking deal that lends legitimacy to Canadas fast-growing marijuana industry while potentially throwing open the door to additional investments in the sector by big international companies. According to the terms announced Monday, an affiliate of Constellation, the New York-based maker of Corona beer and Kim Crawford wines, will pay approximately $245 million for a 9.9 per cent stake in Canopy, Canadas largest licensed producer of medical marijuana. The terms also give Constellation common share purchase warrants that could allow it to double its stake in the Smith Falls, Ont.-based Canopy for the same price about $12.98 per share. Canopy shares surged 19 per cent to close at $15.22 on Monday. Constellations warrants are broken up into two equal tranches that can be exercised on Aug. 1, 2018 and Feb. 1, 2019. Turning point Matei Olaru, chief executive of Lift, a Canadian cannabis media and technology company, said that within the industry the entry of a significant alcohol player had for a long time been seen as a potential turning point. It validates the competitive nature of cannabis versus alcohol, the opportunity from a recreational perspective, plus I think it will open the floodgates for cross-investment, he said, possibly leading to other moves by Big Tobacco, Big Pharma or rival alcohol companies. Because now their competitors are in and theyre not. So I definitely think this is a huge step forward. Its also a bold move by Canopy chairman and chief executive Bruce Linton, said Chris Damas, a veteran analyst and editor of the BCMI Report and the BCMI Cannabis Report newsletters. I believe (Linton) should be called Captain Kirk on this one, Damas said. Hes going where no ones gone before, and it should be interesting to see what the U.S. feds say about this. The deal marks the first major foray of an alcohol company into the marijuana business, but Constellation said it wont sell any cannabis products in the U.S. or abroad until it is legally permissible to do so at all government levels. While a number of U.S. states have legalized marijuana for recreational or medicinal purposes, it remains an illicit substance in the eyes of the federal government. The Canadian government, meanwhile, is moving toward the legalization of recreational cannabis by July. The unique situation led the Toronto Stock Exchange to warn cannabis companies earlier this month that they could be delisted if they are breaking U.S. federal law. Is the DEA and (U.S. Attorney General) Jeff Sessions OK with Anheuser-Busch buying Pharmacielo? asked Damas of a hypothetical deal between the big American brewer and a company that recently received a license to grow cannabis is Colombia. What about Philip Morris buying a Canadian (licensed producer of marijuana)? Are the federal Liberals OK with that deal? Approvals The Canopy-Constellation deal has been conditionally approved by the TSX, Canopy said in a press release. The transaction is expected to close on or around Nov. 2, with no other approvals required aside from that of the stock exchange. But Damas said it was a question mark as to whether U.S. agencies like the Department of Justice or Securities and Exchange Commission take an interest in the transaction. I believe Canopy will benefit quite immensely if this does (go through), because it will pretty much validate them in terms of institutions in the U.S. investing in them, Damas said. Jamie Nagy, co-head of Canadian mergers and acquisitions at Canaccord Genuity, said the companies would have given the legal and regulatory side of the deal some thought. Theyre not doing anything thats illegal, he said. I would assume that they would have had a fair team of lawyers checking that out. Nagy has been anticipating another wave of consolidation in the cannabis industry, which may see big liquor or pharmaceutical companies try to get inside. I think those other guys have been looking at it already, Nagy said. Constellations clearly putting a stake in the ground and laying claim to their horse. Nagy said that Canopy-Constellation deal will accelerate the timeline for those outsiders to do their homework on possible deals and potentially increase their appetite for risk, given there is still some uncertainty in the Canadian cannabis industry. Most provinces have yet to unveil their plans for retailing legalized recreational cannabis and the federal government has yet to pass its legalization legislation. Damas sees the move more as a trial balloon. My personal opinion is theyre going to want to see what happens, he said of companies thinking of following Constellations lead. Canopy and Constellation will develop cannabis-based beverages, and sell them in markets where they are legal, Canopy said, adding that it will use most of the proceeds to pay for research and development and to boost its international growing efforts. gzochodne@postmedia.com Twitter: @geoffzochodne