Constellation Brands is moving further away from its failed multi-billion dollar investment in cannabis producer Canopy Growth, the beer giant announced last week.
Canopy Growth’s three directors who were nominated by Constellation said they will step down from the Canadian company’s board. The Modelo maker also will convert its stake in Canopy to a new category of shares that do not give voting power or the ability to collect payments from the company. Constellation will no longer have representation on Canopy’s board.
“While we remain supportive of Canopy’s strategy, this Transaction is expected to eliminate the impact to our equity in earnings and is aligned to our intent to not deploy additional investment in Canopy as we’ve previously stated in our capital allocation priorities,” Bill Newlands, Constellation’s president and CEO, said in a statement.
Under the new agreement, Constellation’s exchangeable shares in Canopy can be converted into common shares on a one-for-one basis. But the company will wait until the sale of marijuana in the U.S. does not violate the Controlled Substances Act and other restrictions, the brewer said.
In 2018, Constellation invested $4 billion in Canopy and boosted its stake to 39% two years later on the premise that there was long-term promise in cannabis beverages in the U.S. But the market never materialized as expected, leading to a $1.1 billion write-down in its investment in October 2022.
That same month, the brewer announced it would trade its existing shares in the company into new exchangeable shares. It also would no longer be able to approve certain transactions or nominate representations to the board of Canopy.
Federal legislation in the U.S. is far from certain.
The FDA decided not to regulate CBD in food and beverage products, arguing the plants pose potential long-term health concerns. While President Joe Biden has signaled interest in federally reclassifying cannabis as a schedule III drug — which would make it less expensive for producers to sell cannabis-infused drinks in states where it is legal — he has yet to decide on the matter.
In a note to investors Friday, TD Cowen financial analyst Robert Moskow said Constellation moving its shares is a “prudent approach” because it could allow the beverage giant to maintain its relationship with Canopy for future endeavors, while removing the drag on its earnings the cannabis producer caused.
