Things haven’t looked great for Canopy Growth (NYSE:CGC) recently, and CGC stock has been on the ropes for the last six months. Worse, coverage of their troubles is suggesting there’s something deeper to worry about.
InvestorPlace contributor Ian Bezek recently suggested that Canopy Growth is rudderless and sinking without former co-CEO and co-founder Bruce Linton’s involvement in the company. Bezek further suggested that Canopy has been abandoned by its major partner, Constellation Brands (NYSE:STZ), a dual reality that is, most certainly, bad news for owners of CGC stock.
That’s one way of looking at Linton’s departure and Constellation Brands’ desire to bring financial and operational discipline to a company that had gotten ahead of itself.
I, on the other hand, see Constellation Brands doubling down on its investment in Canopy Growth. Here’s why.
We are mere days from the Canadian legalization of cannabis-infused drinks, edibles, oils, tinctures, concentrated extracts, and topical products on Oct. 17. That said, these products won’t be available for a minimum of 60 days, and if the initial legalization in 2018 is any indication, the supply should be somewhat constrained until early 2020.
The kind of products that I would actually use is finally hitting the Canadian market. People in their 40s or 50s, who’ve never smoked in their lifetime, have no desire to start now simply because they could get high. The addition of edibles and drinks will be the tipping point for the Canadian cannabis industry.
So, the announcement Oct. 2 that CGC acquired a 72% stake in Toronto-based sports drinks maker BioSteel Sports Nutrition Inc., with the option to buy the rest at some point in the future, was a very big deal for two reasons.
A Great Company in a Fantastic Market
First, it gets Canopy into the very competitive sports nutrition and hydration market, with a company whose customers, its press release suggests, include “70% of the teams in North America’s four major sports leagues.”
Connor McDavid, Brooke Henderson, Wayne Gretzky, Eugenie Bouchard, and Dallas Cowboys star running back, Ezekiel Elliott, are all brand ambassadors.
“BioSteel has a reputation for being a best-in-class provider of natural sports nutrition products,” commented Mark Zekulin, CEO, Canopy Growth. “This acquisition allows us to enter the sports nutrition space with a strong and growing brand as we continue towards a regulated market of food and beverage products that contain cannabis. We view the adoption of CBD in future BioSteel offerings as a potentially significant and disruptive growth driver for our business.”
The beauty of this acquisition is that it doesn’t need to enter the CBD market for the deal to be a long-term positive for CGC. However, you know it’s headed in that direction.
BioSteel co-founder and co-CEO Michael Cammalleri is a CBD user.
He understands the acceptance of CBD-based products by both professional sports leagues and consumers is changing for the positive as people realize these products provide more effective pain relief while minimizing the negative effects of prescription painkillers.
Canopy and Constellation can take BioSteel to the next level.
A Deal in Constellation’s Wheelhouse
If you think Constellation is about to run away from its multi-billion-dollar investment, I don’t believe you understand why Constellation Brands got involved with Canopy in the first place.
Former CEO Rob Sands, who’s now Executive Chairman, knew that the addition of a fourth revenue stream to complement its beer, wine, and spirits portfolio was a logical extension of its business. As a result, the aggressive entrepreneur first bought a small stake in Canopy in 2017, followed by a $4-billion bet less than a year later, giving it 55% of the business.
“Canopy is Constellation’s arm for participation in the cannabis sector,” Sands explained in a March 2019 interview with CNN Business.
In August, I suggested that Canopy and Constellation, in their search for a new CEO, look to Mark Parker of Nike (NYSE:NKE), Laura Alber of Williams-Sonoma (NYSE:WSM), and Rosalind Brewer of Starbucks (NASDAQ:SBUX) as potential candidates.
Personally, I’d love to see Brewer land the job, but she’s likely got her hands full with Starbucks, not to mention she’s likely the top candidate to replace CEO Kevin Johnson should he ever decide to step aside.
In September, Canopy chairman John Bell said that the company would have a new CEO named by the end of the year. Current CEO Mark Zekulin has already said he would leave the company once a successor is named.
I don’t know who it will be but you can bet Constellation CEO Bill Newlands will have had a big say in the eventual winning candidate.
However, the addition of BioSteel should be a nice enticement for anyone considering taking the top job.
If Constellation were retreating from its investment, there is no way the BioSteel deal would have gotten done. It’s more likely that the company’s beverage experience played a big part in the negotiations beginning in the first place.
The Bottom Line on CGC Stock
It’s easy to get cynical about large companies and their desire to please shareholders before all else.
The truth, however, is that Constellation Brands has a fiduciary responsibility to those shareholders to manage the company’s assets and operations in the most responsible way possible, a role that Newlands and Sands take very seriously.
As Bezek commented, the fact that Linton paid $600 million in stock for Hiku, which generates very little revenue for the company, is a big reason why a little more oversight isn’t a bad thing.
Constellation Brands hasn’t forgotten about its investment in Canopy Growth. BioSteel is a good reminder of that.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.