Cannabis Deal News: Molson Coors Brewing Company Enters into Joint Venture with Medical Pot Distributor

Molson Coors Brewing Company is betting big on the cannabis industry by starting a joint venture with Hydropothecary, an “award-winning medical cannabis producer,” to develop non-alcoholic, cannabis-infused beverages for the Canadian market, in a move that Molson Coors believes will give it a leg up as more countries continue efforts toward legalization.

Last week, Molson Coors said the venture will be a stand-alone startup entity, with its own board (three seats for Molson Coors, two for Hydropothecary) and management team. Molson Coors will hold a 57.5% controlling interest, with Hydropothecary, which now brands itself as HEXO, holding the remaining 42.5%. A chief executive officer is expected to be named in the coming weeks.

As part of the deal, which is expected to close by month-end September, HEXO will issue warrants giving Molson Coors the right to purchase 11.5 million of its shares, at a strike price of $4.62 a share.

Recreational marijuana is slated to become legal in Canada on October 17th, but edible products infused with pot — including beverages — will remain illegal until specific government regulations are rolled out in 2019, at the earliest. Independent research firm Euromonitor International estimates that legal marijuana sales in 2018 will total $7.5 billion (USD) in Canada and $10.2 billion in the U.S.; however, Molson Coors said there are no plans to sell beverages to U.S. states that have legalized cannabis. Edible cannabis products are estimated to consist of around 15% of those sales.

In an August 1st earnings call, Molson Coors CEO Mark Hunter said of the edibles market:

“We believe…it’s got really significant potential, and we’re going to learn a lot. If other markets start to open up in due course, and this becomes federally legal, then we’ll be in a good place at that point in time.”

According to Hunter, after talking with several potential partners, including Aurora Cannabis and Aphria, Molson Coors chose HEXO because of its research and development capabilities, its loyal customer base, and its strong brand recognition. The partnership with HEXO was also cheaper than potential deals with either Aurora Cannabis or Aphria: HEXO’s market cap prior to the announcement of the Molson Coors deal was $590 million, compared to $3.1 billion for Aurora Cannabis and $1.8 billion for Aphria.

Molson Coors also mentioned that itself and HEXO “share a track record of excellent practices, as well as respect for law and regulations.” Some viewed this comment as a swipe at Aphria because of a controversy involving several members of Aphria’s management team failing to disclose personal stakes in Nuuvera prior to Aphria’s acquisition of Nuuvera.

The Molson Coors’ joint venture follows similar moves by other alcoholic beverage companies. Last year, Corona brewer Constellation Brands invested in Canadian cannabusiness Canopy Growth, with plans to develop beverages; this week, Heineken’s Lagunitas brand launched a cannabis-infused sparkling water in California. In May, Aphria said it reached a deal that will see Southern Glazer’s Wine & Spirits become its exclusive distributor of recreational cannabis products in Canada. Similarly, Aurora Cannabis announced in February it would buy a 20% stake in retailer Liquor Stores N.A. Limited.

Undoubtedly, alcoholic beverage companies will continue monitoring developments in the much larger U.S. market — if the U.S. were to relax federal marijuana laws, the possible opportunities could too lucrative to ignore. Molson Coors is hoping that this partnership with HEXO puts it ahead of the curve.