Canopy Growth buys into CBD sports drinks market, CEO bullish on U.S. legalization

Canopy Growth Corp. (WEED.TO)(CGC) is acquiring a majority stake in BioSteel Sports Nutrition Inc. in a move to enter the cannabis-infused sports drink market.

The deal will see the cannabis giant acquire a 72 per cent stake in the Toronto-based sports drink maker with an agreed upon path to total ownership. Financial terms of the deal were not immediately released.

“This is a very exciting strategic opportunity to take a known, established product and brand that speaks for itself and to layer in CBD and bring a differentiated offering into the marketplace,” Canopy Growth CEO Mark Zekulin told Yahoo Finance on Wednesday.

“This is a product that people genuinely use and genuinely believe in.”

Founded in 2009, BioSteel is best known for its pink sports drink used by professional athletes. The company’s products have been purchased by over 70 per cent of the teams in North America’s four major sports leagues. Brand ambassadors include Ezekiel Elliott of the Dallas Cowboys, Connor McDavid of the Edmonton Oilers, tennis player Eugenie Bouchard, Andrew Wiggins with the Minnesota Timberwolves and NHL Hall of Famer Wayne Gretzky.

Non-intoxicating cannabidiol, or CBD, has long been touted as the next big trend in sports beverages and wellness. The cannabis compound is widely-believed to have therapeutic qualities beneficial to athletes. BioSteel has an agreement to use Cowboys running back Elliott as the primary endorser of CBD products if it is officially permitted by the NFL.

“This isn’t about endorsements,” Zekulin added. “Whether it’s the old BioSteel that works for them or the BioSteel with CBD, and then whether they want to talk about it or not, that’s their business. For us, we are focused on putting out the best product possible.”

"The use and acceptance of CBD-based products in the professional sports landscape has changed. We have witnessed the negative effects of prescription painkillers and athletes are looking for healthier alternatives,” said Michael Cammalleri, co-founder and co-CEO of BioSteel in a news release accompanying the announcement. “Its presence is already commonplace amongst NHL players and as a regular CBD user myself, I couldn’t be more proud to champion BioSteel’s evolution and leadership in this space.”

Canaccord Genuity analyst Matt Bottomley said Canopy Growth’s acquisition of BioSteel complements the cannabis company’s existing strategy, adding U.S. exposure without overlapping with its $5-billion deal with Corona beer-maker Constellation Brands Inc. (STZ)

“BioSteel increases Canopy's exposure to the U.S. market after Canopy earlier announced an option/obligation to purchase Acreage Holdings (ACRG-U.CN)(ACRE) should cannabis become legal in the U.S.,” he wrote in a research note on Wednesday. “The purchase adds to Canopy's arsenal an asset that is already a developed brand with several high-profile partners.”

Bottomley has a target price of $60 on Canopy Growth shares with a “speculative buy” rating.

The global sports drinks market was valued at US$22.37 billion in 2018, according to Grand View Research. The firm expects the segment will see a 7.8 per cent compound annual growth rate in the United States alone. Sales of CBD-infused drinks are expected to rise to US$1.4 billion in 2023 from US$227 million this year, according to food and drink consulting firm Zenith Global.

“Joining Canopy Growth, the world leader in cannabis research, development and production, reflects the natural evolution of our brand and will allow us to expand our product offering and global distribution,” said John Celenza, co-founder and co-CEO of BioSteel Sports Nutrition in the release.

“The consumer market and many of our athletes have a growing knowledge of cannabis and CBD products and this partnership ensures that we will continue to raise the bar in the sports nutrition field.”

Canopy Growth said it sees the BioSteel acquisition as laying the groundwork for future CBD-based product offerings globally. BioSteel claims to have more than 10,000 points of distribution in Canada and the U.S., as well as expansion into Europe.

While the latest U.S. Farm Bill legally separated hemp from cannabis containing significant amounts of psychoactive THC, the U.S. Food and Drug Administration maintains that food and drink products containing CBD remain illegal. The cannabis sector is awaiting regulatory clarity on hemp-sourced CBD from U.S. authorities.

“We certainly are bullish on legalization happening,” said Zekulin. “I think there is a general view that states’ rights probably make sense. What we are seeing now is conversations about the details.”

Canopy Growth is also nearing the release of THC-infused beverages under its Tweed banner. Those products are expected to become available in Canada in mid-December.

Toronto-listed shares fell 3.08 per cent to $27.96 at 9:39 ET. New York-listed shares dropped 3.71 per cent to $21.03.

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