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Constellation Brands Hikes Its Stake in Canopy Growth

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May. 4 2020, Updated 11:32 a.m. ET

Constellation Brands (NYSE:STZ) expressed its confidence in Canopy Growth (NYSE:CGC)(TSE:WEED) by increasing its stake in the company. On May 1, Constellation Brands excised 18,876,901 warrants to purchase shares of Canopy Growth. The warrants were issued as part of Canopy Growth’s strategic relationship with Constellation Brands. The companies signed the agreement on November 2, 2017. Constellation Brands excised these warrants at 12.9783 Canadian dollars per share. The amount translated into an aggregate amount of approximately 245 million Canadian dollars. The excise of warrants increased the company’s stake in Canopy Growth by 5.1% to 38.6% of the total shares outstanding.

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Currently, Constellation Brands owns 142,253,802 common shares. Also, the company owns 139,745,453 warrants to purchase common shares and 200 million Canadian dollars of senior notes. If the company excises all of its warrants and converts all of its notes, it could increase its stake to 55.8% in Canopy Growth. The estimates don’t include the effect of Canopy Growth excising its right to acquire Acreage Holdings.

Speaking on the acquisition, Constellation Brands CEO Bill Newlands said, “While global legalization of cannabis is still in its infancy, we continue to believe the long-term opportunity in this evolving market is substantial. Canopy is best positioned to win in the emerging cannabis space and we are confident in the strategic direction of the company under David Klein and his team.”

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Canopy Growth’s stock performance

Overall, Constellation Brands’ announcement about increasing its stake in Canopy Growth increased investors’ confidence. On May 1, after the market closed, Canopy Growth stock rose by approximately 12%. Meanwhile, as of May 1, the company was trading at 21.43 Canadian dollars, which represents a fall of 21.5% since the beginning of this year. Notably, the company’s stock fell due to weakness in the cannabis sector and the outbreak of COVID-19.

Despite the decline, the company has outperformed its peers and the cannabis ETF. Cronos Group (NASDAQ:CRON), HEXO (TSE:HEXO), and Aphria have fallen by 26.5%, 65.7%, and 29.5% YTD, respectively. Meanwhile, the ETFMG Alternative Harvest ETF has declined by 32.5% during the same period. The introduction of Cannabis 2.0 products, expansion of its CBD market in the US, and its strong balance sheet have limited the downside for Canopy Growth. Recently, the company expanded its First & Free brand with the addition of a new line of CBD creams in US markets.

Analysts’ recommendations

Since the beginning of April, Canaccord Genuity has cut its target price from 28 Canadian dollars to 23 Canadian dollars. As of May 1, analysts’ consensus target price was 29.13 Canadian dollars. Notably, the target price represents a 12-month return potential of 23.2%. Right now, analysts favor a “hold” rating for Canopy Growth. Among the 21 analysts, 47.6% recommend a “buy,” while 52.4% recommend a “hold” rating. However, none of the analysts recommend a “sell.”

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