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Canopy Growth Skyrockets After Constellation Brands Increases Stake With $4B Investment

August 15, 2018 8:26 am
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Shares of Canopy Growth Corp (NYSE:CGC) skyrocketed higher by more than 50 percent early Wednesday morning in reaction to an expansion of its partnership with the beverage alcohol company Constellation Brands, Inc. (NYSE:STZ).

What Happened

Canopy and Constellation initially struck a partnership in 2017 in which Constellation bought a 9.9-percent stake in the Canada-based cannabis company. The agreement expanded Wednesday as Constellation will invest C$5 billion ($4 billion) to better position Canopy as a global leader in cannabis production, branding, intellectual property and retailing, a joint press release said. This increases Constellation's ownership stake to about 38 percent.

Canopy also released earnings Tuesday afternoon and said its total fiscal first-quarter revenue rose 63 percent from a year ago to $25.9 million with an average selling price per gram of $8.94. The company said it treats over 85,000 patients within the Canadian medical cannabis sector and it has a global footprint across 11 countries.

Constellation's best-known beer brands include Corona, Modelo and Ballast Point.

Why It's Important

As part of the partnership expansion, Constellation will acquire 104.5 million shares directly owned by Canopy at a price tag which implies a 37.9 percent premium to the stock's five-day volume weighted average price on the Toronto Stock Exchange.

Canopy will use the gross proceedings, the largest to date in the cannabis industry, to strategically build out and/or buy the necessary assets to achieve a true global scale in 30 countries with the U.S. viewed as a strategic priority and will be targeted when it does not contravene federal laws. Canopy said it will benefit from Constellation's knowledge of consumer trends and changing preferences along with its ability to translate this knowledge and create strong connections with consumers.

What's Next

Constellation expects the transaction to be accretive to its earnings per share in fiscal 2021. The company has no plans to engage in new mergers or share repurchases until its leverage target returns to 3.5 times, which is expected to happen within 18 to 24 months of the deal closing.

Canopy Growth shares were trading around $36.07 at time of publication, up 46.7 percent in the pre-market session.

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