Shares of Canopy Growth Corporation (NYSE:CGC) are 26.3% higher as of 10:15 a.m. EDT on Wednesday after the company announced a big investment from alcoholic beverage maker Constellation Brands (NYSE:STZ). Constellation is buying 104.5 million additional shares of Canopy for $4 billion -- roughly 5 billion in Canadian dollars. The two companies are also expanding their relationship to make Canopy the exclusive global cannabis partner for Constellation.
The price tag that Constellation is paying reflects a premium of 37.9% over the five-day volume-weighted average price of Canopy Growth's share price on the Toronto Stock Exchange. For Constellation to pay this kind of premium indicates a great deal of confidence that the partnership with Canopy will pay off.
Constellation invested $191 million (CA$245 million) in October 2017 to buy a 9.9% stake in Canopy Growth. The two companies also established a partnership at that time to develop cannabis-infused beverages. With Constellation's latest investment, the beverage company will own 38% of Canopy assuming that it exercises its warrants.
The deal is by far the biggest one in the cannabis industry to date. It's tremendously important for Canopy Growth, as it gives the company a large cash stockpile to expand globally. Why would Constellation spend so much on the marijuana grower? Constellation CEO Rob Sands stated that "over the past year, we've come to better understand the cannabis market, the tremendous growth opportunity it presents, and Canopy's market-leading capabilities in this space."
Some investors have focused on the potential for a supply glut of marijuana in Canada within the next few years. Constellation's $4 billion investment in Canopy Growth shows that both companies are thinking much bigger than just the Canadian marijuana market.
Canopy Growth now has ample cash to develop and market more cannabis-based products and move into more international markets. Don't look for the company to acquire other marijuana growers in Canada, though. Canopy said that it doesn't need additional capacity in its home country.
However, there are almost 30 countries that either already have or are working toward opening federally legal medical marijuana markets. Expect Canopy Growth to acquire more assets in these countries. And while the company continues to insist that it won't enter the U.S. market in any way that will violate federal laws, Canopy also stated that it views jurisdictions such as the U.S. as "strategic priorities requiring significant capital."
The Constellation-Canopy deal also shakes up the cannabis industry in a way that could impact other marijuana stocks. It won't be surprising to see other major beverage companies forge partnerships with marijuana growers as both Constellation and Molson Coors have.