STZB Constellation Brands, Inc.(Class B)

By Jennifer Maloney and Saabira Chaudhuri 

Corona brewer Constellation Brands Inc. is investing $4 billion into Canadian marijuana grower Canopy Growth Corp., one of the biggest corporate wagers on the potential global market for cannabis-infused drinks and other products.

Constellation, which also produces Robert Mondavi wines and Svedka vodka, has benefited from strong U.S. sales of its Mexican beer imports, Corona and Modelo. But overall beer consumption in the U.S. is in decline, as consumers abandon American lagers for wine, spirits and nonalcoholic beverages.

Over the past year, three big beer companies -- Constellation, Heineken NV and Molson Coors Brewing Corp. -- have announced development plans for cannabis-infused beverages in Canada or the U.S. Heineken's Lagunitas brand launched a cannabis-laced, hop-flavored sparkling water in California in July.

Constellation's new deal follows an initial investment last year, when it took a roughly 10% stake in Canopy and said it would develop nonalcoholic, cannabis-infused beverages for Canada and other legal markets. The new partnership will include "a full suite of products," Constellation CEO Rob Sands said Wednesday on a conference call with analysts, but the company won't introduce those products in the U.S. until allowed by federal law.

Recreational marijuana use in Canada will be legal in mid-October, and edible and drinkable cannabis products are expected to be legalized there by 2019. Independent research firm Euromonitor International estimates that legal marijuana sales in 2018 will total US$7.5 billion in Canada and $10.2 billion in the U.S., where it is allowed for recreational use in nine states and Washington, D.C.

This is "potentially one of the most significant global growth opportunities of this decade,"Mr. Sands said. Canopy, based in Smiths Falls, Ontario, will use the capital to build or acquire assets, he said, noting that about 30 countries are considering legalizing medical marijuana.

Canopy, which was started in 2013, sells medical marijuana products--including dried flower, oils and capsules -- in Canada, Germany and the Czech Republic. It is set to launch recreational products in Canada in October. Canopy recently agreed to buy another Canadian company that has licenses to open retail stores in parts of Canada.

Research on cannabis's impact on alcohol consumption so far has yielded conflicting results. A handful of big alcohol makers have begun investing anyway, on the grounds that cannabis is likely to be a growth engine at a time when alcohol consumption across the developed world is falling, partly due to health concerns.

Big American brewers in particular are under pressure as millennials cut back on drinking and when they do drink, increasingly opt for wine and spirits. U.S. drinkers chose beer just 49.7% of the time last year, down from 60.8% in the mid-'90s, according to trade body the Beer Institute.

Gavin Hattersley, chief executive of Molson's U.S. business MillerCoors, in May described cannabis as one of a number of "micro cuts," which were hurting beer, already suffering from the shift to wine and spirits. Molson Coors earlier this month said it is forming a joint venture with another Canadian cannabis producer to make nonalcoholic, cannabis-infused beverages for the Canadian market.

In the four states in which marijuana has been legal for recreational use for over three years, research firm Bernstein found that average beer consumption relative to the rest of the U.S. had climbed 0.9% after legalization.

By contrast Cowen analyst Vivien Azer says her analysis of data since 2009 shows a consistent decline in U.S. per-capita alcohol consumption and an increase in reported cannabis incidence. A Cowen survey of consumers in North America found over 30% of cannabis consumers report "drinking a lot less."

Constellation said Wednesday it will spend 5.08 billion Canadian dollars ($3.88 billion) to increase its ownership stake in Canopy to 38%. The Victor, N.Y.-based company plans to buy 104.6 million shares of Canopy at C$48.60 each, a 51% premium from its Tuesday closing price in Toronto trading.

In the deal Constellation will also receive warrants in Canopy that, if exercised over the next three years, would give it a more than 50% stake in the company. Constellation will also nominate four directors to Canopy's seven-member board.

Constellation, conscious of its investment-grade credit rating, said it won't engage in mergers, acquisitions or share buybacks for at least 18 months after the deal closes, giving it time to reduce its debt load.

Canopy shares are listed in both Toronto and New York.

Write to Jennifer Maloney at jennifer.maloney@wsj.com and Saabira Chaudhuri at saabira.chaudhuri@wsj.com

(END) Dow Jones Newswires

August 15, 2018 10:19 ET (14:19 GMT)

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