NEW YORK/TORONTO: Constellation Brands, the third largest brewer in the US, has taken a major step into the rapidly growing cannabis market by investing $4bn (C$5bn) in Canopy Growth, a Canadian supplier of medicinal cannabis products based in eastern Ontario.

The companies announced in a joint statement that Constellation, the maker of the Mexican-style Corona and Modelo brands as well as Robert Mondavi wine and Svedka vodka, would acquire 104.5 million shares in Canopy, raising its stake to 38%.

In addition, the investment includes warrants that gives Constellation the option of buying an extra 139.7 million of new shares over the next three years, which – if exercised – could increase its stake in Canopy to more than 50%.

Describing the investment as the “largest to date in the cannabis space”, the companies said it would provide the funds to enable Canopy to “establish global scale” in nearly 30 countries that are looking into allowing the use of medicinal cannabis, while also “rapidly laying the global foundation needed for new recreational cannabis markets”.

“Over the past year, we’ve come to better understand the cannabis market, the tremendous growth opportunity it presents, and Canopy’s market-leading capabilities in this space,” said Rob Sands, CEO of Constellation Brands.

The deal comes just two months after Canada’s parliament passed a law to legalise the recreational use of marijuana nationwide, which is due to come into force in mid-October.

Meanwhile, cannabis is legal for medicinal purposes in at least 14 European countries, as well as Israel, Argentina, Puerto Rico, Panama, Mexico, Turkey, Zambia and Zimbabwe.

And in the US, medicinal use is allowed in 29 states and the District of Columbia, with nine of these states having legalised both medical and the recreational use of cannabis.

Coming at a time when Constellation is beginning to experience stagnating sales in the US beer market, some analysts believe the company has made a shrewd move by tapping into the growing global trend for the liberalisation of cannabis laws and the consumer demand that may trigger.

“This was the right move and further solidifies Constellation’s first-mover advantage as many of the major brewers are now pursuing cannabis as potential growth drivers,” said Bonnie Herzog, an analyst at Wells Fargo, in comments reported by the Financial Times.

“While there could be some cannibalisation risk for Constellation’s beer [and] alcohol portfolio, we believe the strategic partnership will ultimately be incremental to [its] core business,” she added.

For more on the cannabis industry and the legal, reputational and competitive challenges involved, WARC subscribers can read analysis from Euromonitor International in a report, entitled Legal cannabis and the tobacco industry: seeing the buds for the weeds.

Sourced from Constellation Brands, Canopy Growth, BBC, Financial Times; additional content by WARC staff