Constellation Brands, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Equity Method Investments

Equity Method Investments

12 Months Ended

Feb. 28, 2023

Equity Method Investments and Joint Ventures [Abstract]

Our equity method investments are as follows:


	February 28, 2023				February 28, 2022
	Carrying Value		Ownership Percentage		Carrying Value		Ownership Percentage
(in millions)
Canopy Equity Method Investment (1) (2)	$	485.8	34.7	%	$	2,503.5	36.1	%
Other equity method investments	177.5		20%-50%		185.2		20%-50%
	$	663.3			$	2,688.7

(1)The fair value based on the closing price of the underlying equity security as of February 28, 2023, and February 28, 2022, was $398.4 million and $1,014.8 million, respectively. The balance at February 28, 2023, 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 adult-use 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 Years Ended
	February 28, 2023		February 28, 2022		February 28, 2021
(in millions)
Equity in earnings (losses) from Canopy and related activities (1)	$	(949.3)	$	(73.6)	$	(679.0)

(1)Includes a $461.4 million goodwill impairment related to Canopy’s cannabis operations and $359.6 million of costs designed to improve Canopy’s organizational focus, streamline operations, and align production capability with projected demand for the years ended February 28, 2023, and February 28, 2021, respectively.

In May 2020, we exercised the November 2017 Canopy Warrants at an exercise price of C$12.98 per warrant share for C$245.0 million, or $173.9 million. We entered into foreign currency forward contracts to fix the U.S. dollar cost of the May 2020 Canopy Investment. For the year ended February 28, 2021, we recognized net losses on the foreign currency forward contracts of $7.5 million, in selling, general, and administrative expenses within our consolidated results of operations. The payment at maturity of the derivative instruments is reported as

cash flows from investing activities in investments in equity method investees and securities for the year ended February 28, 2021.

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.

We have evaluated the Canopy Equity Method Investment as of February 28, 2023, and determined that there was not an other-than-temporary impairment. Our conclusion was based primarily on the period of time for which the fair value has been less than the carrying value. 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 carrying value in the near-term, it may result in an additional impairment of our Canopy Equity Method Investment.

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 up to 100% of the shares of Acreage). As of February 28, 2023, 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 tables present 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 (i) January through December 2022 in our year ended February 28, 2023 results, (ii) January through December 2021 in our year ended February 28, 2022 results, and (iii) January through December 2020 in our year ended February 28, 2021 results. The year ended February 28, 2023, includes (i) a goodwill impairment related to Canopy’s cannabis operations and (ii) substantial costs designed to drive efficiency and accelerate Canopy’s path to profitability. The year ended February 28, 2021, includes substantial costs designed to improve Canopy’s organizational focus, streamline operations, and align production capability with projected demand. The amounts shown represent 100% of Canopy’s financial position and results of operations for the respective periods.


	February 28, 2023		February 28, 2022
(in millions)
Current assets	$	865.4	$	1,573.3
Noncurrent assets	$	1,362.9	$	3,419.2
Current liabilities	$	500.8	$	189.3
Noncurrent liabilities	$	665.2	$	1,470.4
Noncontrolling interests	$	2.1	$	3.3


	For the Years Ended
	February 28, 2023		February 28, 2022		February 28, 2021
(in millions)
Net sales	$	339.3	$	444.3	$	378.6
Gross profit (loss)	$	(125.7)	$	(18.6)	$	(14.1)
Net income (loss)	$	(2,466.0)	$	(274.3)	$	(1,775.3)
Net income (loss) attributable to Canopy	$	(2,447.9)	$	328.7	$	(1,750.0)

In February 2023, Canopy announced the next series of comprehensive steps to align its Canadian cannabis operations and resources in response to continued unfavorable market trends. In connection with these next steps, Canopy disclosed that it expects to record an estimated pre-tax loss of approximately C$425 million to C$525 million in its fourth quarter of fiscal 2023 and in its first half of fiscal 2024 results. We will record our proportional share of Canopy’s estimated pre-tax loss of approximately C$145 million to C$180 million, in our applicable Fiscal 2024 results.

Plan to convert Canopy common stock ownership

In October 2022, we entered into a Consent Agreement with Canopy pursuant to which we have provided our consent, subject to certain conditions, to the Canopy Transaction. Canopy only holds non-voting and non-participating exchangeable shares of Canopy USA which are convertible into common shares of Canopy USA. Third-party investors will hold 100% of the common shares of Canopy USA.

In connection with the Canopy Transaction, Canopy has proposed to amend its share capital to (i) create Exchangeable Shares and (ii) restate the rights of Canopy common shares to provide for their conversion into Exchangeable Shares through the Canopy Amendment. Canopy has stated its intention to hold a special meeting of its shareholders to consider the Canopy Amendment. We have entered into a voting support agreement with Canopy to vote in favor of the Canopy Amendment.

If the Canopy Transaction is completed and the Canopy Amendment is authorized by Canopy’s shareholders and adopted by Canopy, we intend, subject to a final decision in our sole discretion, to exercise our right to convert our Canopy common shares into Exchangeable Shares. In April 2023, we extended the maturity of the remaining C$100.0 million principal amount of our Canopy Debt Securities by exchanging them for the 2023 Canopy Promissory Note. See “2023 Canopy Promissory Note” below for further discussion.

Assuming the completion of the Canopy Transaction and the transactions contemplated by the Consent Agreement and that we elect to convert our Canopy common shares into Exchangeable Shares:

•we intend to surrender our November 2018 Canopy Warrants to Canopy for cancellation;

•we will only have an interest in Exchangeable Shares, which are non-voting and non-participating securities, and our 2023 Canopy Promissory Note;

•we intend to terminate all legacy agreements and commercial arrangements between ourselves and Canopy, including the investor rights agreement but excluding the Consent Agreement and certain termination agreements;

•we will have no further governance rights in relation to Canopy, including rights to nominate members to the board of directors of Canopy or approval rights related to certain transactions,

•all of our nominees will resign from the board of directors of Canopy; and

•as our investment in Canopy common shares makes up our Canopy Equity Method Investment, we expect to no longer:

◦apply the equity method to our investment in Canopy, which we expect will instead be accounted for at fair value with changes reported in income (loss) from unconsolidated investments within our consolidated results; and

◦have a stand-alone Canopy operating segment as Canopy’s financial results are not expected to be provided to, or reviewed by, our CODM and will not be used to make strategic decisions, allocate resources, or assess performance.

If we do not convert our Canopy common shares into Exchangeable Shares:

•Canopy and its subsidiaries will not be permitted to exercise any rights to acquire shares and interests in entities carrying on cannabis-related business in the U.S.;

•Canopy USA will be required to exercise its repurchase rights to acquire the interests in Canopy USA held by its third-party investors; and

•we will continue to have all existing rights under our agreements with Canopy that predate the Consent Agreement, including governance rights in respect of Canopy (such as board nomination rights and approval rights in respect of certain transactions).

Other equity method investments

My Favorite Neighbor

In April 2020, we invested in My Favorite Neighbor, which we accounted for under the equity method. We recognized our share of their equity in earnings (losses) in our consolidated financial statements in the Wine and Spirits segment up to the date we acquired the remaining ownership interest.

Corporate investment

In February 2022, we sold an investment made through our corporate venture capital function. We recognized a $51.0 million gain for the year ended February 28, 2022, related to the sale of our previously held equity interest in this investment. This gain is included in income (loss) from unconsolidated investments within our consolidated results of operations. Additionally, we recognized our share of their equity in earnings (losses) in our consolidated financial statements in the Corporate Operations and Other segment up to the date we sold our ownership interest.

Subsequent event

2023 Canopy Promissory Note

In April 2023, we extended the maturity of the remaining C$100.0 million principal amount of our Canopy Debt Securities by exchanging them for the 2023 Canopy Promissory Note. The 2023 Canopy Promissory Note bears interest at an annual rate of 4.25% and matures on December 31, 2024. Canopy may prepay the 2023 Canopy Promissory Note in whole or in part at any time prior to the maturity date. If the Canopy Amendment is authorized by Canopy’s shareholders, we maintain our intention to negotiate an exchange of the C$100.0 million principal amount of the 2023 Canopy Promissory Note for Exchangeable Shares, although neither we nor Canopy has any binding obligation to do so.