Constellation expects 4x leverage within a year; 3.5x is target ratio

By Devika Patel

Knoxville, Tenn., Feb. 20 – Constellation Brands, Inc. expects to get to a 4x leverage ratio within a year but is aiming for 3.5x as its ideal leverage target.

“We’re committed to de-levering to about 4x,” chief financial officer David Klein said at the Consumer Analyst Group of New York conference in Boca Raton, Fla., on Wednesday.

“We expect to be within that range within the next 12 months and more specifically we expect to continue to target 3.5x as the place we want to be from a leverage ratio range,” Klein said.

The company recently invested C$5 billion in Canopy Growth Corp., using proceeds from a $2.15 billion October sale of senior notes, and the investment has worked out well for Constellation as Canopy reported in its third quarter earnings that Canopy was on track to perform as Constellation had hoped.

“In our relentless pursuit of growth, we have also recently invested in another leg to spur growth for the future,” president and chief operating officer Bill Newlands said on the call.

“That being Canopy Growth Corp.

“They’re a world-leading Canadian-based diversified cannabis and hemp producer with operations in 12 countries on five continents around the world.

“The question is, why did you invest with Canopy Growth?” Newlands asked.

“Our view was: Canopy was set up to win.

“They have the best science. They have the best leadership positions in the initial major market, which was Canada, and we are doing a lot of things to bring what Constellation can do to help them in areas like brand building and business discipline.

“Our belief is that the deployment of capital that has been done so far is just the first step in Canopy’s winning the global cannabis market worldwide,” Newlands said.

“We have an agreement with the state of New York to put a hemp foothold in the state of New York, and that can easily be translated into THC production when and if it’s legal on a national basis.

“It’s an emerging category and one that we are being very aggressive on.

“We think their technology, their science and their management is primed to succeed.

“We are working aggressively to leverage all of those strengths,” Newlands said.

Canopy, however, is still a start-up company and may take some time to reach its potential.

“It’s going to take a while for Canopy to hit the metrics of a more long-duration company, just given the start-up nature of their business, as well as the start-up nature of the industry that they’re performing in,” Klein said.

“If you understand that our base case is based on Canada and a few medical markets, there’s tremendous upside if major consumer markets like Germany or the U.S. become legal for recreational purposes,” Klein said.

The company has warrants to own 50% of Canopy that are exercisable until November 2021.

“The decision criteria that we have around that exercise is, when we get to 2021, are we convinced that we should own 50% of this business?” Klein asked.

“Meaning, has the business been able to prove itself out in the Canadian marketplace?

“Do we have a good line of sight into legalization in markets like the U.S.?

“And then most importantly, what is the fundamental value of Canopy when we get to that time in November of 2021?

“Canopy last week reported their third quarter, and the third quarter results that we saw indicate to us that they’re completely on track as we require as part of our investment model, so third quarter results lined up with where we would want them to be,” Klein said.

On Oct. 22, Constellation priced $2.15 billion of senior notes (Baa3/BBB/) in four tranches on the tight side of guidance.

A $650 million tranche of three-year floating-rate notes priced at par to yield Libor plus 70 basis points.

The company sold $500 million of 4.4% seven-year notes at 99.812 to yield 4.431% and a spread of Treasuries plus 130 bps.

Constellation Brands priced $500 million of 4.65% 10-year notes with a Treasuries plus 150 bps spread. The notes priced at 99.72 to yield 4.685%.

A $500 million tranche of 5.25% 30-year notes priced at 99.592 to yield 5.277%, or a spread of 190 bps over Treasuries.

BofA Merrill Lynch, J.P. Morgan Securities LLC, Goldman Sachs & Co. LLC, BNP Paribas Securities Corp., PNC Capital Markets LLC and TD Securities (USA) LLC were the bookrunners.

Proceeds were used with cash on hand and credit facility borrowings to invest in Canopy Growth Corp.

Constellation Brands is a Victor, N.Y.-based producer, importer and distributor of beer, wine and liquor.

© 2015 Prospect News.
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