Alcohol giant Constellation Brands is making a foray into marijuana, a precedent-setting move for an industry that has mostly stayed on the sidelines during the cannabis boom.
Constellation will pay about $191 million (C$245 million) for a 9.9 percent stake in Canopy Growth Corp., a Canadian seller of medicinal-marijuana products. The deal kicked off the biggest rally in nearly a year for Canopy, which trades on the Toronto Stock Exchange under the ticker WEED.
The legalization of marijuana in Canada and a growing number of U.S. states is opening up a huge potential market -- just as demand for alcohol is slowing. Still, pot remains prohibited at the U.S. federal level, meaning American companies have to tread carefully.
Constellation, based in Victor, New York, said it has no plans to sell cannabis in the U.S. or other markets until it's legal "at all government levels." For now, it's more a matter of identifying markets with growth potential, said Chief Executive Officer Rob Sands, whose company sells Corona beer, Svedka vodka and other brands.
"Our company's success is the result of our focus on identifying early-stage consumer trends, and this is another step in that direction," he said in a statement.
The deal values Canopy at roughly C$2.5 billion, catapulting the business into the highest echelons of the marijuana industry. Constellation would become the company's biggest shareholder.
As part of the Constellation agreement, the two companies will collaborate on cannabis-based beverages that can be sold as adult products -- but only in places where the products are legal at the federal level.
Canada plans to legalize recreational marijuana by July 2018, but the initial product offerings such as edibles and cannabis-infused beverages will be limited, Canopy CEO Bruce Linton said. Such products will be phased in as Canada moves to extinguish the black market in the coming years.
"This looks a lot like the new normal," Linton said by phone, noting that Canopy and Constellation have a "blank sheet" to create cannabis-infused beverages. "There's no need to include alcohol, nor is there an intent to include alcohol in how we follow through with things."
In the U.S., 64 percent of the population now wants to lift the ban on cannabis, according to a Gallup poll released last week. That's the widest margin since the firm began asking about the topic in 1969, when only 12 percent of the population approved.
Eight states and Washington, D.C., have legalized marijuana for adult use. That means one in five Americans over 21 are allowed to eat, drink, smoke or vape cannabis -- even though it remains illegal at the federal level. The states are Alaska, California, Colorado, Maine, Massachusetts, Nevada, Oregon and Washington.
Twenty-one additional states allow it for medicinal purposes. The legal cannabis market was $6 billion last year and is expected to reach $50 billion by 2026, according to Cowen & Co.
The Constellation deal includes warrants that will let it eventually double its stake. The purchase is expected to close during the company's third fiscal quarter.
Constellation is paying C$12.98 a share, 1.5 percent above Canopy's closing price of C$12.79 at the end of last week. Shares of the marijuana seller, which is based in an old Hershey chocolate factory in Smiths Falls, Ontario, had already surged 40 percent this year.
"We see this transaction as a game-changer for Canopy, as well as the industry at large," Beacon Securities analyst Vahan Ajamian said in a note. He recommends buying Canopy shares and raised his target price to C$16.50 from C$14.