Federal government to review Canopy, Constellation deal

Posted Aug 17, 2018 by Karen Graham
A deal that could see U.S.-based alcohol giant Constellation Brands Inc. take a majority ownership stake in Canada's leading cannabis producer Canopy Growth Corp., will be reviewed by the federal government.
Marijuana being grown in a greenhouse for Canopy Growth Corp in  Smith Falls  Ontario.
Marijuana being grown in a greenhouse for Canopy Growth Corp in Smith Falls, Ontario.
Canopy Growth Corp.
On Wednesday, August 15, Corona beer maker Constellation Brands announced it would invest a further $4 billion in Canada’s top cannabis producer Canopy Growth, giving the beer maker a 38 percent share in the cannabis company. The deal also includes warrants that could let Constellation buy additional shares of Canopy potentially growing Constellation’s ownership in Canopy to over 50 percent.
According to the Financial Times, other than costing Constellation Brands an additional $4.5 billion, the transaction would allow Constellation to nominate four of the seven directors on the Canopy Growth board. All this will take place only after the deal gets shareholder and regulatory approval, and if so, the deal will be finalized in October this year.
According to Seeking Alpha, when the deal was announced, $2.5 billion of Constellation market value was wiped out as investors questioned the beer maker's aggressive bet and the hefty price paid.
And while the investment was touted as being “the largest to date in the cannabis space,” it has drawn the scrutiny of the Canadian government. Specifically, Innovation, Science and Economic Development Canada which says in a statement that the deal is subject to review under the Investment Canada Act.
The Investment Canada Act empowers the government to forbid foreign investments of "significant" size if they do not present a "net benefit to Canada." As of 2014, Canadian policy is to consider over $354 million "significant." In turn, the determination of what substantially constitutes the locus of control of a corporation is governed by the Canadian Ownership and Control Determination Act.
Additionally, the department says the government must review proposed acquisitions of Canadian businesses by foreign companies when the value of the business is $1.5 billion or more for investments originating in trade-agreement-partner countries.
Basically, as Seeking Alpha points out, while the deal, right now may be uncertain for Constellation investors, it also carries a large amount of risk for the company, while for Canopy, everything is coming up roses. After all, says Seeking Alpha, "Canopy essentially sold the company to Constellation at a significant premium."