Pot stocks received another shot in the arm on Monday after alcohol giant Constellation Brands announced it was buying a near 10-per-cent stake in Canadian marijuana company Canopy Growth Corp. for $245-million.
The agreement is considered a signal of how some alcohol companies plan to respond to the growing acceptance of marijuana for medical and recreational use, given changing legislation, and the potential opportunity for investors in the cannabis sector.
"We see this transaction as a gamechanger for Canopy, as well as the industry at large, " Beacon Securities analyst Vahan Ajamian said in a note on Monday. He has a "buy" rating on Canopy shares and raised his target price to $16 from $14.
Shares of Canopy Growth Corp., Canada's largest marijuana producer, were up about 15 per cent in mid-morning trading. Other large producers also saw increases including Aphria Inc. and Aurora Cannabis Inc., which saw their shares rise 7 per cent and 4 per cent, respectively. The Horizons Marijuana Life Sciences Index ETF, Canada's first cannabis ETF, was up 6 per cent.
Mr. Ajamian says there has been speculation that alcohol companies would look to enter the sector but that "such a tie-up occurred much sooner than we expected.
"In our view, this highlights the disruption that the alcohol companies are likely to face as recreational cannabis continues its global march forward – and how the leaders in the sector are looking to get in front of it," he said. "We suspect more alcohol companies may look to accelerate plans to enter the industry – as well as pharmaceutical and tobacco companies."
Constellation, a U.S.-based booze distributor behind brands such as Corona beer and Inniskillin wine, said the investment is part of its "long-term strategy to identify, meet and stay ahead of evolving consumer trends and market dynamics," but its focus will remain on its alcohol business.
The "strategic relationship" will see Constellation provide marketing and brand development to Canopy Growth. The companies also said they'll collaborate to develop and market cannabis-based beverages for adults in markets where it's legal.
"Canopy Growth has a seasoned leadership team that understands the legal, regulatory and economic landscape for an emerging market that is predicted to become a significant consumer category in the future," said Constellation Brands CEO Rob Sands in a release. "Our company's success is the result of our focus on identifying early-stage consumer trends, and this is another step in that direction."
Canopy CEO Bruce Linton described Constellation as a "strategic ally" amid the growth of the global cannabis sector."