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

Constellation Brands, Canopy Growth, 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]