Breaking down the big deal behind Constellation’s bet on cannabis and Wall Street’s involvement

Constellation Brands’ multibillion-dollar wager on Canopy Growth is huge – record setting even – but a much larger story is lighting up across the cannabis industry: Wall Street has arrived.

Financial heavyweights Goldman Sachs and Bank of America Merrill Lynch are officially dabbling in the marijuana industry now, which is a move observers call a transformational moment for the rapidly growing, but nascent industry.

Bank of America Merrill Lynch is financing New York-based Constellation Brands’ investment of 5 billion Canadian dollars ($3.8 billion) in Canopy Growth of Smiths Falls, Ontario, while Goldman advised on the deal.

The transaction appears to be the first mega cannabis investment to involve major U.S.-based financial institutions.

“Wall Street can no longer ignore the pace, the amount of money being raised and the growth underway in this industry,” said Scott Greiper, president at Viridian Capital Advisors in New York.

“We’re going to see more and more of this, because this is how Wall Street banks make their money – doing deals of this size.”

Morgan Paxhia, co-founder of San Francisco-based Poseidon Asset Management, agreed.

“The size of the deal, the premium to the closing price and the institutions involved are all strong signs of confidence about the industry’s direction,” he said.

Until now, major U.S. financial players have sat on the sidelines – deterred largely by cannabis’ federally illegally status. The regulatory environment has left U.S. cannabis companies scrambling to raise cash through life savings or by tapping into family offices and venture capital funds.

Meanwhile, marijuana operators in Canada have been able to raise billions by legally accessing the public markets. Canada legalized medical cannabis in 2001 and is poised to launch a recreational market on Oct. 17.

The entry of big American investment banks into the Canadian cannabis market underscores that “you have to have your hands really rinsed off of any exposure to the U.S. cannabis market to make these deals work,” said Alan Brochstein, analyst and founder of 420Investor.

In the United States, big banks will continue to avoid cannabis investments as long as the federal government deems it illegal to service the industry, Brochstein said.

That means U.S. cannabis operators will continue to fall short of the growth underway in Canada, said Kevin Murphy, CEO of New York-based Acreage Holdings.

“America’s (market) will continue to lag other countries in terms of major corporate investment as long as the challenges of the cannabis regulation landscape remains status quo,” he said. “To make America first, we must see federal descheduling of cannabis.”

As Canada’s biggest players continue to grow, others across the industry will hustle to keep up, observed Frank Lane, president of CFN Media in Seattle.

“Expect similar deals, backed by U.S. banks, to close as Big Alcohol and (Big) Tobacco stake their claim,” he said.

Jeffrey Zucker, president and co-founder of Denver-based Green Lion Partners, added that “many industry members and investors are preparing for the inevitable consolidation that is to come.”

Lisa Bernard-Kuhn can be reached at [email protected]

7 comments on “Breaking down the big deal behind Constellation’s bet on cannabis and Wall Street’s involvement
  1. Ma Dang on

    it makes one wonder how and why these large American companies and investors are choosing to enter the sector.
    I do agree, the clock is ticking and big businesses are desperate to find a way to make The American Cannabis Industry “Great Again” or at least arm’s length investment in it (read: make them stupid rich, again) at the public’s expense and peril.

    Reply
  2. tridehydro on

    Complete BS. Constellation BORROWED the money. Yes, your company can BORROW $3.8 Billion dollars with only $210 million of CASH ON HAND, from a handful of banks that frankly don’t exactly have a great reputation for PERFORMANCE within the cannabis market. Turns out the “little guy” will crush all of these big banks, IF they had access to the legal market, which the government seems bent on keeping from happening. For all you non believers out there, heres an example. 1 pound of cannabis with NO THC goes for between $15-65$. Whats the difference in cost for the farmer to produce a no thc product, ZERO. Why such a large difference between the 2 markets? GOVERNMENT, and the banks up above are the best at “bribing the refs” while the espouse the “Free Market” principals of capitalism…. VERY FREE MARKET of them….

    Reply
    • Michael Davis on

      The government doesn’t realize or possibly doesn’t want to eliminate the Black Market from cannabis which the government is missing out on controlling and collecting taxes on 50-60% of the market instead of 98-99% as they do with the alcohol industry.

      Reply
  3. Mike on

    Cultivating stupidity and division has always maximized profit and power to the people who run the US. When we figure out how to break that equation we stand a much better chance of being great again.

    Reply
  4. Michael Davis on

    The key to the cannabis industry will not be in controlling the production of the plant nor the refined products as the key to the industry will be in creating the demand. There were over 1,000,000 pounds of weed produced in Oregon last year seeing the wholesale price drop from $2000 a pound to less than $400. When the cannabis industry matures and legalization occurs the plant will be treated as a farm commodity and the price to the end consumer will be set by the free market and not the government added tax model presently in place. To do that the plant will have to be regulated by the USDA but the processed products will be regulated by the ATF as recreational substances and not by the FDA and DEA as dangerous drugs. That will eliminate the Black Market in cannabis and allow the government to regulate and collect tax on 98-99% of the market rather than the 40-50% they do now under the current scenario. The only things that create the demand are marketing & advertising, media, entertainment and hospitality. That is where investments should be placed and not in grow operations.

    Reply

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