What Canopy is doing with the money from Constellation
It was the watershed moment in a still-nascent global cannabis industry that finally made investors perk up to pot. One year ago today, alcohol giant Constellation Brands Inc. (STZ.N) announced it would make a $245-million investment for a 9.9 per cent stake in Canopy Growth Corp. (WEED.TO), the Smiths Falls, Ont.-based cannabis producer that many outside of Bay Street circles may not have heard about until then.
For Canopy Co-CEO and Chairman Bruce Linton, the deal marked the justification of a hustle that began about four years ago when he co-founded the firm with former Liberal Party chief financial officer Chuck Rifici. But as Linton describes it, it was his two-decades-long tenure as a tech executive that gave him the ability for Canopy to negotiate its initial agreement with Constellation, which ultimately led to its blockbuster deal for another $5-billion investment nine months later.
“Our main drive was to create good intellectual property,” Linton said in a recent phone interview with BNN Bloomberg. “We'd been spending a lot on lawyers and scientists for several years, so we thought we've created some good IP and that attracted Constellation. It wasn't a plan but it was an outcome.”
Linton has always described Canopy as a “tech company that produces cannabis,” and its ability to protect and copyright the various cannabis strains as well as the processes and ancillary services behind it helped convince Constellation to raise its investment to a 38 per cent stake, along with warrants that could give the Corona beer maker majority control of the pot firm. It also formed the foundation for other major players to jump into the once-stigmatized pot space – such as Molson Coors Brewing Co.’s joint venture with Hexo Corp. – and fueled meteoric rises in market valuations for rivals such as Tilray Inc. and Aurora Cannabis Inc.
Aside from Linton’s entrepreneurial zeal stemming from more than two decades of working in Ottawa’s technology scene, Canopy’s initial research into processing patents, medical trials and its work developing consumer products, such as beverages, that included cannabis as a central ingredient attracted Constellation Brands to connect with the company, Linton said.
“What [Constellation] wanted was their right to use what we were developing, but what they knew is that we needed a lot more cash so we could create a lot more of it,” Linton said. “That was a good driver of getting the deals done both on Constellation's side and ours.”
Steve Ottaway, managing director of investment banking at GMP Securities LP, has participated in many cannabis financing deals, but not the Canopy-Constellation deal. He said Constellation likely decided that if it wanted to be a player in the cannabis-infused drink market – part of a consumer cannabidiol (CBD) market that is estimated to grow to US$2.1 billion by 2020, according to the Hemp Business Journal – it had to put all its chips on the table.
“We were trying to finance Canopy at the same time but we didn’t know we were shadowboxing against someone else,” Ottaway said in a phone interview. “Bruce had to decide if he wanted to take money from the market or Constellation.
“At the end of the day, his decision to move ahead with Constellation was a game changer.”
Neil Selfe, chief executive officer at Infor Financial Group Inc., describes Linton as an “Energizer Bunny” who has been a frequent player in the Ottawa tech space. It was an impression that stuck with the Toronto-based financier who opted to provide Canopy with $5 million in early-stage financing at a time when dozens of Bay Street doors were being shut in Linton’s face.
“Bruce had a front row seat to the [dot-com] circus and I think from that he learnt that you always want to be number one,” Selfe told BNN Bloomberg in an interview at his Bay Street office. “You always want to be number one in a nascent space if you raise enough capital, and you build the capital in the right way. He was relentlessly focused on obtaining and retaining first mover advantage in his business and that includes technology, IP and financing.”
Constellation executives declined to be interviewed for this article.
Selfe said that just after the deal was announced, he hosted a group of 20 institutional investors at Infor’s offices for a pitch by Linton. Those same investors wouldn’t even pick up the phone prior to Constellation’s investment, Selfe noted.
The Constellation deal “was the seminal capital markets event in the space that saw large institutional investors begin to participate in cannabis,” Selfe said. “The deal took the sector from the fringes to one that was legitimate in the eyes of the financial community.”
As Linton reflects back on the deal, he notes that Canopy remains the only company thus far that has announced any multibillion dollar deals with investors from outside the traditional pot industry in the past year, despite ongoing speculation that other companies such as Diageo PLC, Altria Group Inc. and The Coca-Cola Co. are circling the sector.
“It really changed the shape, size and accent of the audience. Everyone who was looking at this space wasn't from Toronto or Vancouver anymore. It became global,” Linton said.
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