Alcohol giant cut bait on craft beer holding

Constellation Brands just cut bait on a billion-dollar craft beer bet that fell short of expectations, but the seller of Corona and Modelo in the United States says it plans to ride out an even heftier investment in cannabis — even though it, too, hasn’t panned out as initially hoped.

Four years after paying $1 billion for the fast-growing Ballast Point Brewing, Constellation Brands this week unloaded the iconic craft beer brand to little-known Chicagoland brewer Kings & Convicts for an undisclosed sum.

Constellation struggled to grow Ballast Point nationally as it competed against established local breweries and shifting consumer tastes. During the past two years, Constellation shut down brewhouses and wrote down the San Diego brewery’s trademark value by more than $200 million to $17 million, regulatory filings show.

“It was a drag on their business, they didn’t know how to deal with it,” Laurent Grandet, a Guggenheim analyst who covers Constellation, told CNN Business. “There are very few craft beers that are successful nationally.”

As Constellation reviewed and reallocated its beverage holdings, Grandet said shedding Ballast Point was likely made easier because a new chief executive is at the helm. CEO Bill Newlands started in the role in March, replacing Robert Sands, who now serves as the company’s executive chair.

Constellation cutting its losses from a once-splashy acquisition doesn’t mean similar moves are in store for its $4 billion wager in cannabis, a company spokesperson says.

Constellation shelled out more than $4 billion for a 38% stake in Canopy Growth, a Canadian cannabis firm that has — along with other North American cannabis companies — hit significant headwinds in efforts to expand and be profitable. Companies and investors were overly bullish in how quickly the Canadian recreational program and international cannabis markets — notably the United States — would develop.

“It’s the industry, it’s clearly the industry,” said Morningstar analyst Kristoffer Inton. “Every Canadian cannabis company has had the same story the last two quarters.”

As Canopy’s losses started to mount, they’ve put a drag on Constellation. For the nine-month period that ended on Nov. 30, 2019, Constellation recorded $544 million in non-cash equity in earnings losses attributable to Canopy, which translated to a $125.4 million net loss on a comparable non-GAAP basis adjusted for one-time items.

Constellation hasn’t been sitting idly by as Canopy lost money. Canopy founder and former co-CEO Bruce Linton said his sudden departure came at the behest of a board of directors led by Constellation appointees. Canopy’s current chief financial officer also is a Constellation alumnus.

“Constellation’s investment in Canopy Growth is entirely separate from our core business,” Mike McGrew, Constellation’s senior vice president of corporate communications, said in an email to CNN Business. “While we expect to see continued near-term volatility in the emerging cannabis space as markets around the world evolve and mature, we see this as a huge long-term growth opportunity.”

The crux of the investment — leveraging Constellation’s expertise in beverages and distribution in developing cannabis-infused drinks and other consumable products — should soon start to come into play. Canada marked the one-year anniversary of its recreational cannabis program with the planned launch of “Cannabis 2.0,” the allowance of cannabis derivatives such as gummies, drinks and vapes into the marketplace.

The first products could hit the shelves this month. On Friday, Canopy said its first products, chocolates and beverages will not hit the market until January 2020 and February 2020, respectively.

“Leveraging learnings from Cannabis 1.0, the company will stagger its launch of various products and formats to ensure a smooth roll-out,” according to an announcement from Canopy. ” As such, availability will vary by province based on their individual ordering and distribution activities.”

Another critical element of Canopy’s future rests in an agreement to buy American multi-state cannabis company Acreage Holdings for $3.4 billion once cannabis becomes fully legal in the United States.

“[The Acreage agreement] positions Canopy to assume a leading position in what is expected to be the largest market in the world when cannabis becomes federally permissible in this country,” McGrew said via email. “We remain very excited about the future of Canopy Growth.”

In the short-term, not all are as bullish. Guggenheim analyst Grandet said he holds a negative view on the investment. Constellation likely overpaid and the deal is occupying executives’ mindshares and distracting them from the key aspects of their business.

“We are nervous about the Canopy investment outside Constellation’s core competency with no clear path to generate any meaningful returns in the near term,” he wrote to investors in a Dec. 4 research note.