The cannabis deal space is finally getting attention of the big names on Wall Street.
A $4 billion investment by Constellation Brands into Canopy Growth drew support from Bank of America Merrill Lynch and Goldman Sachs (GS) , making it the first time Constellation has officially announced the names of the high-profile banks.
Bank of America has committed to provide the credit facility for Constellation Brands to purchase roughly $4 billion in Canopy Growth stock to bring Constellation's stake in the company up to 38%.
"The fact that Bank of America is providing the financing for the transaction provides another level of validation for the industry in general," said Paul Rosen, CEO of Tidal Royalty and co-founder and ex-CEO of cannabis company Cronos Group. "If cannabis wasn't part of the mainstream investment sector before this deal, it definitely is now."
Goldman Sachs advised Constellation Brands on its move to purchase stock in Canopy Growth and name it as its exclusive global cannabis partner.
The company did not disclose if Bank of America or Goldman Sachs were involved in the earlier transaction nine months ago.
While pot remains illegal on a federal level in the U.S., top echelon investment banks are already winning business for M&A and capital-raising activities through perfectly legal transactions.
To date, mid-tier banks such as Canaccord Genuity and Cowen & Co have been providing both research support and advising services to Canadian and some U.S. players.
But with the first multi-billion dollar deal in the space coming on Wednesday, the top-tier bankers have made their presence known at the cannabis deal-making table.
Greenhill & Co. Canada served as exclusive financial advisor to Canopy Growth on the deal.None of these names has been widely associated with cannabis, but given the bullish outlook for the business for both sales, capital-raising and deal-making, Wall Street banks are likely to continue to play a role.
Bruce Linton, CEO of Canopy Growth, told analysts on Wednesday that big pharma, major consumer packaged goods companies and other large corporations are studying cannabis products.
"Everybody is looking at this," he said.
The interest stems from huge growth expected in the business. Linton said estimates for a $200 billion worldwide market by 2030 may be too low because cannabis may come to be used in a wider array of products than currently expected.
Given Linton's view, the mega players eyeing the business will bring with them the law firms, big-name banks and other capital providers that they've used in the past.
Meanwhile, U.S. bond investors are also in the mix, with holders of public debt in Constellation Brands exposed to higher leverage because of the Canopy Growth deal.
The increase in the Canopy stake will up Constellation's debt-to-EBITDA leverage to 4.6 times from 3.8 times at the end of its first fiscal quarter in May, according to Moody's.
As a part of the deal, Constellation reiterated its target net debt to EBITDA leverage of 3.5 times and plans to halt share repurchases and acquisitions, as a way to avoid a debt downgrade "Constellation's investment in Canopy is a large bet at a very rich price, which can only be justified if the company proves that it can benefit from the changing environment for cannabis in Canada and beyond," Linda Montag, Moody's senior vice president, said in a statement.
