Constellation Brands, Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Equity Method Investments

Equity Method Investments

3 Months Ended

May 31, 2022

Equity Method Investments and Joint Ventures [Abstract]

Our equity method investments are as follows:


	May 31, 2022				February 28, 2022
	Carrying Value		Ownership Percentage		Carrying Value		Ownership Percentage
(in millions)
Canopy Equity Method Investment (1) (2)	$	2,353.5	36.1	%	$	2,503.5	36.1	%
Other equity method investments	180.5		20%-50%		185.2		20%-50%
	$	2,534.0			$	2,688.7

(1)The fair value based on the closing price of the underlying equity security as of May 31, 2022, and February 28, 2022, was $711.9 million and $1,014.8 million, respectively. Refer to discussion below on other-than-temporary impairment considerations.

(2)Includes the following:


	Common Shares	Purchase Price
(in millions)
November 2017 Canopy Investment	18.9	$	130.1
November 2018 Canopy Investment	104.5	2,740.3
May 2020 Canopy Investment	18.9	173.9
	142.3	$	3,044.3

Canopy Equity Method Investment

We complement our beverage alcohol strategy with our investment in Canopy, a leading provider of medicinal and recreational cannabis products. Equity in earnings (losses) from the Canopy Equity Method Investment and related activities is determined by recording the effect of basis differences. Amounts included in our consolidated results of operations for each period are as follows:


	For the Three Months Ended May 31,
	2022		2021
(in millions)
Equity in earnings (losses) from Canopy and related activities	$	(165.0)	$	(155.8)

Canopy has various equity and convertible debt securities outstanding, including primarily equity awards granted to its employees, and options and warrants issued to various third parties, including our November 2018 Canopy Warrants, Canopy Debt Securities, and the Acreage Financial Instrument (a call option for Canopy to acquire 70% of the shares of Acreage at a fixed exchange ratio and 30% at a floating exchange ratio). As of May 31, 2022, the exercise and/or conversion of certain of these outstanding securities could have a significant effect on our share of Canopy’s reported earnings or losses and our ownership interest in Canopy.

We have evaluated the Canopy Equity Method Investment as of May 31, 2022, and determined that there was not an other-than-temporary impairment. Our conclusion was based on several contributing factors, including: (i) the period of time for which the fair value has been less than the carrying value, (ii) an expectation that Canopy’s results will improve, (iii) an expectation that the Canopy stock price will recover in the near-term, and (iv) our ability and intent to hold the investment until that recovery. We will continue to review the Canopy Equity Method Investment for an other-than-temporary impairment. If Canopy’s stock price does not recover above our C$20.54 carrying value in the near-term, it may result in an impairment of our Canopy Equity Method Investment. There may also be a future impairment of our Canopy Equity Method Investment if our expectations about Canopy’s prospective results and cash flows decline, which could be influenced by a variety of factors

including adverse market conditions or if Canopy records a significant impairment of goodwill or intangible or other long-lived assets, makes significant asset sales, or has changes in senior management.

The following table presents summarized financial information for Canopy prepared in accordance with U.S. GAAP. We recognize our equity in earnings (losses) for Canopy on a two-month lag. Accordingly, we recognized our share of Canopy’s earnings (losses) for the periods January through March 2022 and January through March 2021 in our three months ended May 31, 2022, and May 31, 2021, results, respectively. The three months ended May 31, 2022, includes substantial costs designed to drive efficiency and accelerate Canopy’s path to profitability. The amounts shown represent 100% of Canopy’s reported results of operations for the respective periods.


	For the Three Months Ended May 31,
	2022		2021
(in millions)
Net sales	$	88.2	$	117.3
Gross profit (loss)	$	(125.7)	$	7.7
Net income (loss)	$	(456.8)	$	(487.1)
Net income (loss) attributable to Canopy	$	(453.7)	$	(552.9)

Subsequent event

Canopy Debt Securities

On June 29, 2022, certain holders of Canopy Debt Securities agreed to sell C$255 million of their Canopy Debt Securities to Canopy at 99% of principal value in exchange for newly issued shares of Canopy common stock. As part of this transaction, we agreed to sell C$100 million of our Canopy Debt Securities in exchange for Canopy common shares. The number of common shares issuable will be based on the volume-weighted average trading price of Canopy's common shares on the Nasdaq for a 10-day trading period beginning on and including June 30, 2022, provided that the exchange price will not be less than $2.50 or more than $3.50. As a result of the exchange, we will receive between 30.7 million and 21.9 million Canopy common shares in July 2022. This sale is not expected to significantly change our Canopy ownership percentage and we will continue to hold C$100 million of our Canopy Debt Securities following this transaction. As part of this transaction, the Canopy Debt Securities were amended to remove Canopy’s right to settle the Canopy Debt Securities on conversion into Canopy equity shares. As a result, the Canopy Debt Securities may only be settled in cash.