By Ciara Linnane, MarketWatch
Constellation Brands Inc.’s move into the marijuana business makes strategic sense and will give the company a first-mover advantage in the weed market that will complement its leading role in the booze market.
That’s the view of Wells Fargo analyst Bonnie Herzog, who reiterated her outperform rating on Constellation Brands’ stock on Monday and said it remains her favorite beverage stock pick.
The distributor of Corona beer /zigman2/quotes/207737284/composite STZ -0.64% is acquiring a 9.9% stake in Canada’s Canopy Growth Corp. /zigman2/quotes/202205609/delayed CA:WEED -2.65% with the aim of developing drinkable marijuana products to be sold in Canada as soon as it legalizes marijuana for recreational use, a move expected in 2018, and other countries where it is legal.
Drinkable marijuana is a small but growing part of the North American legal market, which is worth about $8 billion today, according to cannabis research company ArcView Group , and expected to grow to about 23 billion by 2021.
“Overall, we think this deal makes a lot of sense—there has been an ongoing concern about the potential negative impact on beer/wine/spirit sales from the state-level legalization of marijuana that has already occurred in the U.S., and this gives STZ a clear first mover advantage in insuring that it remains not just the leading Total Alcohol Beverage Company, but indeed, the Total Alcohol-Marijuana Beverage Company,” Herzog wrote in a note.
Constellation Brands is paying $190 million for the stake with options to acquire an additional 9.9% in equity in the future via warrants at the same price. The deal is expected to close in early November.
GMP analysts led by Martin Landry said the move is the first big investment by a public multinational in the cannabis industry and confirms the substance is viewed as a threat by alcohol companies. GMP is expecting other companies to follow suit.
For Canopy, the move removes a financing overhang, and gives the company access to significant resources in marketing and brand building.
“Today’s announcement catapults WEED in a league of its own,” the analysts wrote in a note. “The company now has significant financing to accomplish its aggressive expansion plans.”
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The company is not planning to market the products in the U.S. market for now, but if recreational marijuana were to be legalized as advocates are hoping, it would expand sales to the U.S.
Marijuana is legal for medical use in 29 U.S. states and legal for recreational use in 8 states plus Washington, D.C. It remains illegal at the federal level, however, where it continues to be classified as a Schedule I drug, which puts it in the same category as heroin, LSD and ecstasy.