Constellation Brands is an alcohol company and if you have been into a bar you may have had one of their brands. Their brands include: Corona, Modelo, Robert Mondavi and SVEDKA vodka. According to David Milstead of the Globe and Mail, last October Constellation brought some shares in Canopy Growth Corp – a medical cannabis company. In Canada and slowly in the US, cannabis is becoming legal, upon becoming legal the market size is expected to increase.

When Constellation Brands bought the shares, they were likely thinking long term because this is a new industry, but what it did was offered a stamp of legitimacy for smaller investors (full disclosure I own some shares in an Index fund) to buy and for institutional investors to begin nibbling at the stocks.

Constellation spent $245 million to buy 18.9 million shares at $12.97 a piece. In addition it bought warrants to buy another 18.9 million shares at 12.97. The warrants expire in 2020.  At the end of June, the shares were trading at $36.93. This means the investment is worth close to $1.2 billion – $700 million for the shares and $500 million for the warrants.

The company because it owns 9.9% of the company avoids the equity method of accounting where it would take a proportional share of Canopy’s losses and place them on the balance sheet. According to Robert Willens a Wall Street analyst, if the company owned 10% or more, given Canopy lost $70 million, the company would report a $5 million cut in Constellation earnings.

Linking to dividend paying stocks, the reporting of taxes helps you understand why companies do some of their actions. The purchase by Constellation was a long term benefit because the laws are changing, but not the taxes. There are many considerations and taxes and the rule of law are important aspects that go into making investments profitable companies make. It is prudent for profitable companies to have investments in multiple companies and industries shift. Sometimes these investments help make the company an even easier company to make an investment in.

There are more questions than answers, till the next time – to raising questions.