Wednesday, Aug 15th 2018

Investment in WEED


The fact that STZ is making a prescient investment in WEED this early shows they understand this trend

Constellation Brands announced it will invest an additional $4B in cannabis company Canopy Growth (WEED), increasing its ownership to 38%, with the option of buying more shares to achieve 50%+ ownership in coming years.

STZ is acquiring the new shares in WEED at a price of 48.60 CAD per share, which is a ~50% premium to the closing price on August 14th. This transaction is expected to be accretive to the company’s full year earnings in 2021.

As a result of the new shares Constellation is acquiring, Canopy Growth will immediately upon closing have proceeds of approximately $5B CAD ($4B USD) to bolster its leadership position in the global cannabis industry.

STZ remains committed to its investment grade rating and therefore, has no plans to engage in mergers, acquisitions or share buybacks until the company returns to its 3.5x leverage target, which is expected to occur within 18-24 months of deal closing.

Why is the stock down on this news? Some investors are disappointed that the company paid a 50% premium for ownership in a weed company -- cash that could've been spent on other beer acquisitions or share buybacks.

We disagree. We think cannabis represents a massive secular growth opportunity in North America, and it is a strategic fit with the alcoholic beverage giant. Instead of alcohol, many consumers will opt for cannabis in coming years.

From CEO Rob Sands: “This is potentially one of the most significant global growth opportunities of this decade." Canopy will use the capital to build or acquire assets. There are about 30 countries currently considering legalizing medical marijuana, with many more expected in the future.

The fact that STZ is making a prescient investment in WEED this early shows they understand this trend and took the opportunity to buy more of this strategic venture at a discount to what it would cost in a few years' time.

As of this writing, STZ was a portfolio holding of Titan. This security may cease to be a portfolio holding at some point in the future.
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