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2019-10-09 16:35:54

Dive Brief:

Canopy Growth announced an all-cash purchase of 72% of BioSteel Sports Nutrition. Canopy said in a release it gains a significant platform to enter the sports nutrition and hydration segment, and the deal also lays the groundwork to put CBD in future products, including those to be sold in the U.S.

Canopy Growth​ interim CEO Mark Zekulin said in the release adding CBD to future BioSteel offerings is a potentially significant and disruptive growth driver for our business. The deal allows the company to enter the sports nutrition space with a strong and growing brand as we continue towards a regulated market of food and beverage products that contain cannabis, he said.

BioSteel, founded in 2009, focuses on premium natural ingredients, product transparency and identifying the essential nutrients needed to power physical activity, Canopy said. The company said the brand is used by many high-performance athletes, including brand ambassadors Ezekiel Elliott of the Dallas Cowboys, Andrew Wiggins with the Minnesota Timberwolves, NHL Hall of Famer Wayne Gretzky, and Gleyber Torres of the New York Yankees.

Dive Insight:

This partnership between two Canadian companies could be lucrative, given the expertise Canopy has in cannabis and hemp products and the brand identity BioSteel has established in sports nutrition. It's not difficult to imagine CBD-infused products for athletes being introduced under the BioSteel label — backed by Canopy's R&D, production and distribution experience. And since BioSteel currently has more than 10,000 distribution points in the U.S. and Canada, such an extensive reach could benefit both.

Another impetus behind the move could be the growing demand in sports for healthier alternatives to prescription painkillers, which BioSteel Co-Founder and Co-CEO Michael Cammalleri said in the release have had negative effects on athletes. He said the use and acceptance of CBD products in professional sports has changed, and it's now common among National Hockey League players.

Sports drinks could be a smart segment for Canopy since the better-for-you variety is popular as a convenient pick-me-up for busy consumers — as well as for athletes and weekend warriors. The deal also gives Canopy the possibility of 100% ownership of BioSteel at some point in the future, so the possibilities for the company could extend further.

The market for CBD-infused products is shaping up to be even more valuable. According to Fior Markets, the global CBD industry was worth $1.45 billion in 2018 and is projected to reach $17.34 billion by 2026, for a compound annual growth rate of 36.3% from 2019 to 2026. Canopy has already been developing CBD-infused chewables and chocolates, so there may be adjacencies it can explore between foods and beverages.

The BioSteel investment was considered a bit of an unexpected move for Canopy, said Motley Fool analyst Mark Prvulovic. A number of investors had balked at the company's $1.4 billion in quarterly losses revealed in August, he said. Its losses have dragged down earnings of alcohol giant Constellation Brands, which owns a minority stake. And the company has no permanent leadership. CEO and co-founder, Bruce Linton, abruptly left in July — telling CNBC Constellation Brands had terminated him. Zekulin, who had been co-CEO with Linton, has said he will leave as soon as a new leader is chosen, which should happen by the end of the year, The Motley Fool reported.

Despite these challenges, Prvulovic noted a number of significant upsides to this latest deal — namely that Canopy's majority stake in BioSteel puts it ahead of its competitors in a high-growth niche. Those competitors are a growing group and include Edmonton-based Aurora Cannabis, which recently announced a research partnership with Ultimate Fighting Championship to test whether CBD compounds can help the mixed martial arts league's athletes with common injuries.

While these budding alliances between CBD companies and the sports world sound promising, new CBD products such as sports drinks could still run afoul of regulatory uncertainty in the U.S., where the Food and Drug Administration has still not approved it for inclusion in foods and beverages. Canada, meanwhile, will permit some cannabis-infused products to be sold in stores nationwide in December.

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