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The Street
The Street
Tony Owusu

Constellation Switches to Hands Off Approach With Canopy Growth

Four years have passed since Constellation Brands (STZ)  announced that it would invest $4 billion in Canadian cannabis company Canopy Growth (CGC), and now the the beer and spirits maker is officially taking its hands off the wheel.

This week, Canopy announced plans to consolidate all of its U.S. cannabis assets into a holding company called Canopy USA. Meanwhile Constellation intends to transition its existing common shares of Constellation into new exchangeable shares.

“We believe that the conversion of our ownership interest will maintain Constellation’s ability to realize the potential upside of our investment in Canopy,” said Constellation CEO Bill Newlands.

Constellation currently owns about 35.7% of the company, but the new exchangeable shares will not allow the company to nominate representatives to Canopy's board or approve certain transactions. 

The beer maker behind Corona and Modelo will also no longer get Canopy financial results to review. 

On the other hand, Canopy USA will be used to expedite the purchase of Acreage Holdings, Jetty Extracts, and Wana Brands. Previously, the plan had been for Canopy to acquire the companies once the U.S. legalize marijuana federally, Canopy CEO David Klein told Bloomberg.

Constellation Brands

Canopy Causing Pain

When Constellation first made its investment in Canopy, the move made Canopy Constellation a global cannabis partner. Rob Sands, CEO of Constellation at the time, called the cannabis industry "a tremendous growth opportunity."

Constellation has been willing to swallow some of the pain coming from Canopy due to the company's positive view of the potential U.S. recreational market, which it values at $25 billion currently. Constellation expects the U.S. market to double by 2026.

It also went out of its way to praise the progress Canopy has made in establishing itself in the U.S. market.

"I think they are positioned to the be a winner in the U.S.," said CEO Bill Newlands. "We still believe that the longer run brands are going to matter, and I think they're positioning themselves to have the right brands that will matter over the long run here in the U.S."

The company says that it is also happy with the "improvements" the company is making in Canada.

Recently, Canopy announced that it is exiting the retail business in Canada and selling all of its 28 corporate-owned stores in the country. 

High inventory and falling prices has forced the entire industry into survival mode and Canopy has been cutting costs for months.

In April, the company laid off 8% of its workforce as part of an effort to achieve C$150 million ($110.6 million) in savings.

Constellation's Quarter

The company reported net sales of $2.65 billion leading to earnings of $3.17 per share. Analysts were expecting revenue of $2.51 billion with earnings of $2.82 per share.

Beer sales saw a double-digit increase, as did operating income growth thanks to continued strength in its Model Especial and Corona Extra brands.

Constellation expects beer net sales to grow between 8% and 10% in 2023 with operating income growing between 3% and 5%.

Apparently boxed wine is making a comeback on kitchen counters across America because Constellation is doubling down on the sector as part of its wine and spirits innovation strategy.

The company's direct-to-consumer wine and spirits business saw 15% growth year over year. 

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