While many big companies such as Anheuser Busch InBev NV (BUD) and CVS Health Corp. (CVS) are rushing to profit from the fast-growing global cannabis market, Fortune 500 giant Constellation Brands Inc. (STZ) -- seller of spirits, beer and wine -- may be the best positioned to profit from the burgeoning market.
Constellation is busy laying the groundwork “to take a leading position in the global alcohol/cannabis industry over the next decade plus,” according to Wells Fargo analyst Bonnie Herzog, as cited by Barron’s. The company already has put several key stones in place. In November, Constellation bought a 38% stake in Canadian pot producer Canopy Growth Corp. (CGC), giving Canopy the funds to sharply expand its business in 30 countries. Marking another major milestone for both Canopy and Constellation, the Canadian producer has agreed this month to buy U.S. pot seller Acreage Holdings once cannabis becomes legal under U.S. federal law.
Constellation and Canopy: Key Developments
- Constellation makes $4 billion bet on marijuana, buys 38% stake in Canopy
- Constellation deal gives Canopy funds to expand in 30 nations
- Canopy agrees to buy major U.S. seller Acreage Holdings for $3.4 billion
- Constellation tweaks deal, including fixing price, that allows it to lift Canopy stake to 50%
- STATES Act introduced, which would federally decriminalize pot in states where it is legal
The major potential is that Constellation, whose $7.6 billion in annual sales are nearly 100-fold bigger than Canopy's, will be able to leverage its extensive distribution network in the U.S. and globally to also sell cannabis products to a market expected to grow to tens of billions of dollars yearly. That also could fuel Constellation's stock. Although Constellation's market value is more than $40 billion, tiny Canopy's value already is approaching half that at $16.6 billion.
Deal Waits for STATES Act to Pass
Canopy this month agreed to buy the American cannabis company, Acreage Holdings, for $3.4 billion, granted that the STATES Act is passed by the U.S. Congress and the president. The new bill, introduced last week, would federally decriminalize marijuana in states where it is legal under state law. Many experts expect pot to be legal on a federal level by 2020.
If pot becomes legal under federal law, Constellation might do more than raise its stake to 50%. Some analysts expect Constellation to ultimately buy 100% of Canopy in the race to secure a leadership position.
While the marijuana industry is poised to flourish worldwide, Constellation and Canopy face numerous obstacles, including regulatory, supply and quality issues. But the payoff certainly seems to far outweigh the risks for Constellation given the rosy outlook. Grandview Research, one of many forecasters, sees global market reaching more than $146 billion in annual sales by 2025, per Grandview Research.