The Constellation Brands, Inc. (NYSE:STZ) (FRA: CB1A) – Canopy Growth Corp. (TSE:WEED) (NYSE:CGC) (FRA:11L1) deal has obviously been a transformative to the cannabis sector. A simple look at WEED/CGC’s price chart in the weeks following October 30, 2017 and August 15, 2018 paints an exacting portrait of the blazing investor inflows chasing shares ever higher. But can the same be said from Constellation Brands’ viewpoint? Surprisingly, it cannot—and that’s one primary reason why the direct equity cannabev deal pipeline could be more prolonged than expected.

Specifically, I’m referring to the amazingly static enterprise value (EV) afforded to Constellation Brands at the present time. While Canopy Growth has added untold billions of market capitalization as a direct result of its STZ affiliation, Constellation Brands has essentially gone nowhere since partnering-up back in 2017.

Whether we’re talking about the original $245 million investment, the C$200 million senior convertible note purchase in June, or the more significant $5 billion direct equity stake in August (plus optionality for another $4.5 billion in warrants), Constellation Brands EV remains stubbornly stuck in neutral. The performance has mirrored its stock performance to the letter.

In contrast, close Constellation Brands competitors have yielded better results. Since October 30, 2017, Diageo Plc is marginally higher (↑1.77%), while behemoth U.S. spirits and wine maker Brown-Forman Co. is ↑20.85%. Neither of these companies have entered the cannabis space to date.

Of course, many other factors influence the company’s stock price independent of its interest in Canopy Growth. For instance, on June 29th Constellation Brands lost ↓5.79% on adjusted EPS of $2.20/share (revenues slightly beat) which missed Wall St. estimates for its first fiscal quarter. After a one day sell-side market event, trading volume resumed its normal 1-2 million hare trajectory (no lasting damage). Two other non-Canopy Growth related gap events have occurred in the post-Canopy Growth era; both devoid of any lasting consequences.

In short, Constellation Brands is one of those stable, predictable consumer package goods companies which produces remarkably consistent results year-after-year. It can do so because of the nature of the business in which it operates—alcohol sales is a highly regulated and predictable business. As long as it executes its operating strategy, the company is virtually guaranteed to deliver on its quarterly and full-year forecasts, within a small margin of error.

So that being the case, it’s puzzling how all the deal’s stock boosting benefits have gone directly to Canopy Growth. By my calculations, Constellation Brands has—or will by October’s end—accrued several billion dollars worth of enterprise value to its balance sheet, even if’s not currently reflected in the stock price. Remember, enterprise value is calculated as the market capitalization plus debt, minority interest and preferred shares, minus total cash and cash equivalents. At the end of next month, Constellation Brands will control approximately 38 percent ownership of Canopy Growth, assuming the October 2017 issued deep-in-the-money warrants are exercised.

In terms of the present and pending enterprise value WEED has delivered for STZ, my calculations are as follows:

Date Equity/Warrant/Price Present Value Current Net Gain Comments October 30, 2017 18,876,901 shares purchased at $12.98 $1,278,721,273 $1,033,699,098 acquired 9.9% stake October 30, 2017 18,876,901 common share warrants at $12.98 $1,278,721,273 $1,033,699,098 exercision a formality June 20, 2018 C$200,000,000 senior notes purchased, convertible to 9,363,000 common shares *$652742640 *$452742640 WEED likely to redeem notes for cash by July 20, 2021 August 15, 2018 104.5 million shares purchased directly at $48.60/share $7,078,830,000 $2,000,130,000 Tx closes end of October 2018 88,500,000 warrants issued at $50.40/share $4,460,400,000 $1,534,590,000 exercisable over the next 3 years 51,300,000 warrants issued at VWAP undetermined undetermined

From the calculations above, I figure Constellation Brands enterprise value has increased by around $5.602 billion dollars, if all warrants—minus the 51.3 million exercisable at VWAP (undetermined)—were exercised today. If we exclude the 88,500,000 warrants issued at $50.40/share—since those warrants cannot be exercised for almost three years, however good they look—Constellation’s enterprise value has increased by $4.067 billion (including the windfall 18,876,901 common share warrants exercisable at $12.98).

The latter figures represents about ten-percent of Constellation current $40.48 billion market cap on a non-diluted basis.

How Constellation’s Lack of EV Mojo Could Slow the Cannabev Deal Pipeline

The lack of Constellation’s EV mojo demonstrates, in my opinion, the quandary Big Alcohol and beverages companies face towards making big equity commitments in the cannabis sector. While the STZ-WEED deal has been fantastic for everyone from a value perspective, it nonetheless acts to pressure the acquirer stock price in several ways. And as we all know, quarterly stock performance—to which equity-based compensation is frequently tied—along with job security tend to trump distant priorities. No management team wants to face constant shareholder scrutiny a sagging share price entails.

One the one hand, staking billions of dollars pressures quarterly performance in the near term. For starters, you have tens of millions in underwriting, advisor and legal fees, which is not helpful in making the numbers. If the acquirer taps on a new or existing credit facility, internal debt/equity ratios may get precariously out of line, and higher interest payments hurt present cash flow. Perhaps most importantly, financing big cannabis equity stakes could derail all-important share buyback programs—which is exactly what happened in Constellation’s case. There are other dampening factors which are beyond the scope of the article to discuss.

Part of the reason Moody’s Investors Service affirmed STZ’s Baa3 rating was that it pledged to halt its $3 billion share buyback program for the rest of 2018—and possibly beyond. While that will help Constellation return to proper debt/equity balance, the cancellation is stock price negative. How could it not be with the company-sanctioned invisible hand withdrawing from the bid?

On the other hand, if STZ were to exercise all existing and new warrants, its ownership would exceed 50 percent. If and when that happens, Constellation Brands would consolidate Canopy Growth’s financial results with its own, resulting in a proportional share of income showing up on the parent company’s income statement.

In other words, when Canopy Growth is making $316.7 million in net income in FY 2020 ($1.47/share), Constellation Brands will incur the bulk of WEED’s earning on its balance sheet, which is the endgame all along. In reality, that moment may not occur until 2H 2021, when all the warrants become exercise-eligible, but you get the picture.

The spirits maker is playing the long game, and it’s going quite well—even if present EV seems to be lacking.

Final Thoughts

Most investors view future cannabev acquisitions as inevitable, given the symmetries both industries provide for each other. But what most miss is the complexities the acquiring stakeholder faces upon committing untold billions to the cannabis industry. As we’ve seen with Constellation Brands, just because the deal is well-received, doesn’t mean it’s necessarily good for the acquirer stock price. There’s no shortage of beverage companies looking to take on joint venture-type deals. But when that deal becomes capital intensive, the dynamics change completely.

Perhaps we’ll find out shortly whether another Big Alcohol player is willing to forgo short term performance for the long term reward.