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Will the drinks industry have a cannabis-inspired October? - Analysis

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We're approaching the first anniversary of Constellation Brands' move into the cannabis space. And, if drinks industry observers were excited then, they're even more excited now.

Constellation Brands has been first major drinks company out of the blocks to enter the cannabis arena

Constellation Brands has been first major drinks company out of the blocks to enter the cannabis arena

In late-October 2017, Constellation spent just over US$190m on a near-10% stake in Canopy Growth Corp, a Canada-based medicinal cannabis producer. Since then, the group has upped its holding in Canopy Growth to 38% - a move that cost Constellation a cool $4bn.

Where Constellation has led, others have followed, most notably Molson Coors who, earlier this Summer, teamed up with Hydropothecary Corp, also based in Canada.

While some investors expressed disquiet following August's stake increase, both Constellation and the analyst community are united in their giddiness at the potential for cannabis in the drinks world.

In a note following Constellation's half-year results yesterday, Vivian Azer, a drinks analyst with Cowen & Co, noted Constellation's bullish position. "Constellation's management reiterated the move (for Canopy Growth) was an offensive one, rather than suggestive of a slowing beer business. In fact, the company voiced they have not seen any evidence of alcohol cannibalisation from cannabis and they expect cannabis to be 100% incremental to Constellation in the future."

Wells Fargo's Bonnie Herzog concurs: "We remain excited about Constellation's opportunity in the cannabis space," she wrote yesterday.

Mitul Girotra at Societe Generale, meanwhile, highlighted the reported pile-on by other drinks companies into cannabis. "With more companies (Diageo and Coca-Cola as per recent media reports) realising the scale and timeline of the opportunity and looking to acquire Canadian companies, we think Constellation's early move was a reasonable strategic decision as prices of cannabis assets have skyrocketed."

The legalisation of recreational cannabis later this month, however, could just be the starter before a more appetising main course arrives. 

"The US opportunity," noted Herzog, "is rapidly unfolding and could accelerate with the passage of the US Farm Bill (after the November elections?). Enactment of the bill would effectively decriminalise CBDs (the non-psychoactive component of cannabis) at the federal level and put it in the hands of states to regulate commercialisation/consumption of the drug."

The next few weeks could see a whole lot of cannabis M&A going on.

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