Constellation exits polyphenols business for the promising vistas of cannabis

23-Apr-2019 - Last updated on 23-Apr-2019 at 16:10 GMT

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Constellation Brands has pivoted out of a smaller ingredient category—polyphenols—and into a much larger one —cannabis. Eyebrows were raised last week when the company projected that Canopy Growth, the cannabis grower that Constellation invested heavily in last year, will generate $1 billion in revenue this year.

Constellation Brands is mostly known as the world’s third largest producer of beer. It also produces wine and spirits, markets in which it now has a smaller footprint following a $1.7 billion deal announced last month to sell a selection of lower priced wine and spirit brands to E&J Gallo. The transaction included dietary ingredient supplier Polyphenolics, which has developed a line of proprietary grape seed extracts, a business that began in trying to find added value in the leftover mast from wine production in California’s Central Valley.

According to Constellation’s CEO Bill Newlands, throwing Polyphenolics into the deal had mostly to do with the sale of the Mission Bell, CA facility it operated out of. But it seemed obvious, too, that the business was mostly an afterthought in the overall strategy to restructure the corporation.

Focused on cannabis

Now Constellation is focused squarely on the cannabis markets when it comes to its non alcohol activities. The structure of its $4 billion investment in Canopy reportedly will allow it to fairly easily increase its stake, which now stands at about 38% of the company.

Canopy is based in Smiths Falls, Ontario, but with the new federal Farm Bill in place it is now moving into the US market.

Canopy has announced a $3.4 billion deal to buy Acreage Holdings, which has extensive cannabis acreage in the US. Before the passage of the Farm Bill, for legal reasons companies whose stock traded on public exchanges were constrained from large scale deals in the sector, but now all bets are off. Canopy is now said to the be largest cannabis company by book value in the world.

CFO David Klein said the uncertain regulatory picture in the US makes ti difficult to project Canopy’s future results. Constellation said Canopy is interested in medical and recreational cannabis, which is expected to include cannabis-infused beverages. As to the ingredient that is all the rage here in the US—CBD—Klein said it’s too early to tell where that will fall in the company’s strategy.

“We still don’t have clarity on CBD products, how they’ll be regulated in the US,” Klein said, in a recent earnings call with analysts that was posted in transcript form on the site seekingalpha.com. In its fiscal 2019 year end earnings, Constellation reported $8.1 billion in revenue, a 7% rise over 2018.