An investment banker who routinely talks to beverage and pharmaceutical executives likes to tell a quick story about the current state of the world: Every meeting with CEOs used to start with five minutes of small talk about U.S. President Donald Trump. Now every session starts with a conversation about cannabis.
Part of cannabis and investing
Constellation Brands Inc.'s $5-billion investment in Canopy Growth Corp. is more than just an expanded partnership between the owners of Robert Mondavi wine and the folks who got their start just five years ago growing marijuana in an abandoned chocolate factory in Smith Falls, Ont. This is a defining transaction for an industry, in part because a leading consumer-product company is staking its claim to the recreational marijuana market and in part because Wall Street is now fully embracing cannabis.
The federal Liberals' ground-breaking move to legalize recreational cannabis this year, along with a mature market for medical marijuana, has spurred the creation of several relatively large made-in-Canada companies. Canopy Growth has emerged as the clear industry leader; chairman and co-chief executive Bruce Linton has already expanded the focus from the domestic market, served by what’s grown in that former Hershey’s facility, to operations in 30 countries.
But when Mr. Linton looks ahead, he sees his sector attracting the attention of deeper-pocketed rivals based in the beer, spirits, tobacco and pharmaceutical industries. In a conference call on Wednesday, Mr. Linton said: “When you talk about competitors and why we’re doing this now, we have a great position and a great start. This is about accelerating and getting way further out there before those other big names are in, getting our products, staking our claims, having the leverage that we have now."
Canopy Growth cut this deal to build a war chest in a volatile sector and to better tap Constellation’s global expertise in marketing and retailing, as Mr. Linton tries to do for cannabis what Sam Bronfman did for rye whisky. Constellation is betting that Canopy Growth can come up with cannabis beverages that rival the popularity of wine and beer.
Until recently, Canopy Growth could fund expansion only with the backing of a handful of independent Canadian investment dealers, and a largely retail investor base. U.S. federal regulations put strict limits on the work banks can do for cannabis companies in the United States. So major Wall Street firms steered clear of them, as did the big Canadian banks, which have extensive U.S. networks and did not want to run afoul of Washington regulators and a capricious President.
GMP Capital Inc. took Canopy Growth public in 2015. Only recently did BMO Nesbitt Burns Inc. become the first Canadian bank-owned dealer to devote significant resources to the cannabis sector, including work for Canopy Growth.
Constellation Brands, a Fortune 500 stalwart, turned heads last October by making an initial toehold investment in Canopy Growth, buying a 9.9-per-cent stake for $245-million. With legalization coming in Canada, it’s now clear that transaction signalled cannabis was evolving from something sold by street-corner dealers to a product in corner stores.
Wednesday’s $5-billion investment by Constellation featured Goldman Sachs Group Inc. as the U.S. company’s adviser – the first cannabis deal for the Wall Street firm – while Merrill Lynch put its reputation and balance sheet on the line by financing Constellation’s investment. There is no record of Merrill Lynch loaning money to a cannabis company in the past.
Across the table, New York-based boutique investment bank Greenhill & Co. worked with Canopy Growth, its second major mandate from the company. Again, Canopy is the first cannabis client for Greenhill.
The U.S. investment banks that worked for Constellation and Canopy Growth all expect this deal to be the first of many. Most beverage, tobacco and pharmaceutical companies are looking for a cannabis strategy, and most Canadian marijuana producers have global ambitions. Add Wall Street investment banks to that mix, and cannabis deals will become as common and acceptable as cannabis consumption.