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

6 Months Ended

Aug. 31, 2022

Equity Method Investments and Joint Ventures [Abstract]

Our equity method investments are as follows:


	August 31, 2022				February 28, 2022
	Carrying Value		Ownership Percentage		Carrying Value		Ownership Percentage
(in millions)
Canopy Equity Method Investment (1) (2)	$	634.8	34.1	%	$	2,503.5	36.1	%
Other equity method investments	198.6		20%-50%		185.2		20%-50%
	$	833.4			$	2,688.7

(1)The fair value based on the closing price of the underlying equity security as of August 31, 2022, and February 28, 2022, was $634.8 million and $1,014.8 million, respectively. The balance at August 31, 2022, is net of a $1,060.3 million impairment of our Canopy Equity Method Investment (see “Canopy Equity Method Investment” below).

(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
July 2022 Canopy Investment (i)		29.2	76.8
		171.5	$	3,121.1
(i)	In June 2022, certain holders of Canopy Debt Securities agreed to exchange C$262.6 million aggregate principal amount of their Canopy Debt Securities to Canopy at 99% of principal value for newly issued Canopy common shares. As part of this transaction, we exchanged C$100.0 million principal amount of our Canopy Debt Securities for Canopy common shares which we received in July 2022. This exchange did not significantly change our Canopy ownership percentage.

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 Six Months Ended August 31,				For the Three Months Ended August 31,
	2022		2021		2022		2021
(in millions)
Equity in earnings (losses) from Canopy and related activities (1)	$	(815.7)	$	(35.3)	$	(650.7)	$	120.5

(1)Includes a $460.8 million goodwill impairment related to Canopy’s cannabis operations for the six months and three months ended August 31, 2022.

We evaluated the Canopy Equity Method Investment as of August 31, 2022, and determined there was an other-than-temporary impairment. Our conclusion was based on several contributing factors, including: (i) the period of time for which the fair value had been less than the carrying value and the uncertainty surrounding Canopy’s stock price recovering in the near-term, (ii) Canopy recording a significant impairment of goodwill related to its cannabis operations during its three months ended June 30, 2022, and (iii) the uncertainty of U.S. federal cannabis permissibility.

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, 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 August 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.

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 June 2022 and January through June 2021 in our six months ended August 31, 2022, and August 31, 2021, results, respectively. We recognized our share of Canopy’s earnings (losses) for the periods April through June 2022 and April through June 2021 in our three months ended August 31, 2022, and August 31, 2021, results, respectively. The six months and three months ended August 31, 2022, includes a goodwill impairment related to Canopy’s cannabis operations. The six months ended August 31, 2022, also 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 Six Months Ended August 31,				For the Three Months Ended August 31,
	2022		2021		2022		2021
(in millions)
Net sales	$	174.5	$	228.1	$	86.3	$	110.8
Gross profit (loss)	$	(126.8)	$	29.9	$	(1.1)	$	22.2
Net income (loss)	$	(2,092.0)	$	(169.7)	$	(1,635.2)	$	317.4
Net income (loss) attributable to Canopy	$	(2,085.4)	$	(233.5)	$	(1,631.7)	$	319.4