October 30, 2017 / 6:04 PM / 23 days ago

Constellation hedges bets on pot boom with Canopy stake

(Reuters) - Constellation Brands Inc (STZ.N) has bought a nearly 10 percent stake in Canadian cannabis maker Canopy Growth Corp (WEED.TO) for about C$245 million ($191 million), the first major wine, beer and spirits producer to invest in legal cannabis.

The move by the maker of Corona beer and Svedka vodka comes as Canada and a growing number of U.S. states move to legalize marijuana for recreational use, raising question marks over its illegal status at the U.S. Federal level.

Constellation said it had no plans to market cannabis or lobby for its legalization in the United States in the near future and analysts said the relatively small stake would allow it to take advantage of any future boom - or to exit if one does not materialize.

“One of the hallmarks of our success over the years has been our commitment to identify and stay ahead of early stage consumer trends,” the company said in a statement on the deal.

“This is another step in that direction,” it added.

Eight states, including California and Nevada, have legalized marijuana, already widely approved for medicinal use, for recreational use and some studies show consumers would buy the drug instead of alcohol if it was freely available.

A number of pharmaceutical companies have products that are cannabis derivatives and smaller investors have poured money into Canadian producers this year: the index of Canadian marijuana stocks calculated by research house Canaccord Genuity rose 36 percent in the month to Oct. 11.

But major firms in other sectors have kept their distance, worried by the connotations of involvement with a banned substance.

“We’re obviously trying to get first-mover advantage,” Constellation Chief Executive Rob Sands told the Wall Street Journal, adding that he expects cannabis to be legalized nationwide in the United States in coming years.

THREAT

Eight Capital analyst Daniel Pearlstein said that the move validated the cannabis industry as both a threat and opportunity for larger established companies in industries including alcohol and tobacco.

“This move is a complete game changer, not only for Canopy, but also for the entire industry,” he said.

Vivien Azer, an analyst at brokerage Cowen, said that data showed 18-25 year olds - a key market for spirit makers - perceived alcohol as increasingly risky compared with cannabis, for which risk perceptions have halved in a decade.

Industry watchers also say cannabis consumers have reduced their alcohol intake in U.S. states following legalization.

“We were ... able to show in our research in Colorado, Washington and Oregon that there has been a negative impact in alcohol consumption ... post the legalization of adult-use cannabis,” Azer said.

Analysts said a more immediate option for Constellation could be to develop non-alcoholic cannabis-infused beverages for the Canadian cannabis market, which consultants estimate could be worth around $5 billion to $10 billion.

The deal also comes ahead of the widely anticipated move by Canada, to legalize cannabis for recreational use nationwide by July 2018. The following year, edible and drinkable products are expected to become legal.

Canopy Growth is the biggest licensed producer of medical marijuana in Canada and is traded on the Toronto Stock exchange with a market capitalization of C$2.2 billion.

Constellation said the deal also gives it the option to purchase an additional ownership interest in Canopy in the future.

($1 = 1.2823 Canadian dollars)

Additional reporting by Ankur Banerjee and Manas Mishra in Bengaluru; editing by Patrick Graham

Our Standards:The Thomson Reuters Trust Principles.
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