Cannabis is one of the biggest business opportunities that investors have seen in a long time, and even some of the biggest companies in the world are looking for ways to cash in. With Canada having legalized recreational marijuana earlier this week, companies that are headquartered in the Great White North have gotten huge amounts of attention, and Canopy Growth (NYSE: CGC) has become one of the most-followed cannabis companies in the market.
One reason why Canopy Growth has gotten so much attention is that it was able to score a huge deal with beer and spirits maker Constellation Brands (NYSE: STZ) in August. With Constellation plowing $4 billion into Canopy in exchange for raising its stake in the cannabis company from 10% to 38%, Canopy shareholders are excited about the prospects for the collaboration between the two companies going forward. Yet none of this could have happened without the vision of Canopy co-CEO and co-founder Bruce Linton and how he convinced Constellation CEO Rob Sands to make a massive move. Fortunately, Linton told the story of how things happened at a consumer sector investment conference last month, and what he said reveals a lot about what could lie ahead for Canopy and the broader marijuana industry.
Boxes and bottles of cannabis products on a wood shelf mounted to a wood-paneled wall.
Image source: Canopy Growth.
Going back to the beginning
Linton started by explaining how Canada came to the forefront of the cannabis industry in the first place. Back in 2000, the Canadian Supreme Court ruled that any law prohibiting marijuana had to include exemptions for legitimate medical use, with the court suspending its decision's effectiveness for one year to give legislators and law enforcement officials time to plan for the opening of the floodgates for medical marijuana. However, the regulatory and legal framework for marijuana production remained uncertain, as patients using medical marijuana either had to grow their own plants or had to find a reputable source of medical cannabis. That made it tough for law enforcement officials to know whether someone was legally growing marijuana for medical purposes or illegally growing it for recreational purposes.
As time went by, the Canadian government figured out that the key to regulating the cannabis industry successfully was to keep a tight chain of custody, and its platform for regulation helped Linton start Canopy Growth. By ensuring a ready source of unadulterated cannabis, Canopy was able to convince medical professionals and regulators that it was a superior alternative to other, less reputable sources of marijuana in the market. That in turn made Canopy's business model attractive to companies that wanted to stake a claim in the rapidly growing marijuana industry.
Constellation's role in cannabis
In leading up to comments about the Constellation deal, Linton told a story about Canopy's efforts to get listed on a major U.S. stock exchange. As the Canopy co-CEO explained, the NYSE was initially resistant to letting Canopy become the first marijuana company ever to list on the exchange, despite the fact that Canopy wasn't in violation of any federal laws and otherwise met the conditions for listing. Yet when Constellation started investing in Canopy, the question came up of whether Constellation would lose its NYSE listing for the same reasons that Canopy was given for not being allowed to get listed. As Linton tells it, the exchange considered that issue, and that led not only to a decision to keep Constellation's business but also to allow Canopy itself to trade on the NYSE.
The Constellation investment itself found its origins in comments that CEO Rob Sands made back in late 2016. Linton remembers that Sands said that investing in marijuana wouldn't necessarily be a very bad idea, and that it would actually be smart for Constellation to be involved in cannabis-related opportunities. That led Linton to reach out and start what would become a nearly year-long discussion before Constellation's initial investment for a 9.9% stake in Canopy in late 2017.
Yet that first bite at the apple only whetted Constellation's appetite, especially when other companies in the consumer space started to look at the potential of cannabis-derived products. Linton explains what led to the massive $4 billion deal:
We collectively agreed that there was an opportunity if you added rocket fuel that a company called Canopy could probably achieve a breakout move that would make the question of who's 2, 3, and 4 [in the cannabis industry] a very good question but not the question of who's going to be the dominant player in this really rapidly emerging sector. And so I think time will prove that acceleration at just the right time creates a change in where you're orbiting.
Linton sees the current environment as "a once-in-a-lifetime global change" in which he's lucky to have a front-row seat. With other countries looking closely at Canada's regulatory structure as a potential model for their own legalization efforts, Canopy has put itself in a great position to benefit from international expansion going forward.
What's next for Canopy?
Some believe that Canopy won't have a very long life as an independent company, especially because Constellation has the right to take an even larger stake in the cannabis producer in the future. A full takeover of Canopy seems like a logical next step for the maker of Corona and Modelo beer.
Yet regardless of whether Constellation and Canopy fully join forces or remain independent, their relationship stems from the vision that their respective leaders have. With Linton and Sands at their helms, Canopy Growth and Constellation should remain at the forefront of the cannabis industry for years to come.
Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
