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Canopy Growth marijuana stock surges after new Constellation stake

16 August 2018

Canada will become the first G-7 country to legalize pot for recreational use on October 17, while states from California to Colorado have already made the drug legal and medical use of cannabis continues is growing globally.

"This is rocket fuel", Canopy Chief Executive Officer Bruce Linton said on the company's earnings call Wednesday.

Spirits company Constellation Brands announced Wednesday it will significantly boost its investment in Canada's Canopy Growth in a big bet on the growth of cannabis-based products.

"While STZ (Constellation) is paying a rich premium. we believe this was the right move and further solidifies STZ's first-mover advantage.", Bonnie Herzog, a senior analyst at Wells Fargo, said in a note.

The investment follows a deal a year ago that saw the Corona-beer maker acquire a almost 10 per cent stake in Canopy for $245 million and included collaboration on the development of cannabis-based drinks.

The Constellation deal comes as other alcohol companies have also started honing in on the cannabis industry. Canopy shares jumped 33 percent to C$42.95 at 9:53 a.m, giving it a market value of C$9.36 billion.

Shares of Canopy Growth closed down 8.2% in Toronto on Tuesday at C$32.15.

Canopy, based in Smiths Falls, Ontario, has specialized in the medical product and doesn't now have operations south of the border.

Victor, N.Y. -based Constellation is buying 104.5 million Canopy shares at $48.60 each to lift its stake to 38 per cent, marking the largest single investment in the legal marijuana sector to date. The announcement caused Canopy's stock price to shoot up by over 30% this morning.

"Canopy Growth remains committed to not entering the USA market in any manner that would contravene US federal laws", the company said in a statement. "There will be nothing federally illegal in what we do", he said.

A big focus of the deal is acquiring businesses in other countries where cannabis use is federally approved, he said. The company is not putting hard guidelines on how it plans to use the influx of capital, though its target acquisition list exceeds $1 billion globally, Linton said on the call.

But the marijuana market is relatively immature, so Constellation's investment is seen as a major endorsement of the industry.

Canopy's revenue rose 63 percent to C$25.9 million in the three months ended June 30 from a year earlier.

Also on Wednesday, Canopy reported a net loss $91-million, or 40 cents a share for its fiscal first quarter of 2019, as it made large investments ahead of Canadian legalization. Canopy will continue to be led by its existing management.

"Constellation's concentration of global cannabis activities exclusively through Canopy, coupled with the investment and its expert capabilities in brand-building, marketing, consumer insights and M&A, will be a huge benefit as we look to expand our portfolio in Canada, the United States and emerging cannabis markets around the globe".

Canopy Growth marijuana stock surges after new Constellation stake