What happened
Shares of Aphria (NASDAQOTH: APHQF), Cronos Group (CRON +0.80%), and Tilray (TLRY +0.00%) were up 13.7%, 20.3%, and 19.7%, respectively, as of 11:54 a.m. Monday. All three stocks received a boost as investors anticipated that they could be prime candidates for a deal with British alcoholic beverage maker Diageo (DEO 1.73%), known for its products such as Crown Royal whisky and Guinness beer.
On Friday, BNN Bloomberg reported that Diageo was in discussions with at least three Canadian marijuana growers. Aphria, Cronos Group, and Tilray weren't specifically mentioned as candidates, but the stocks have been trending steadily upward since Canopy Growth announced a $4 billion investment from Constellation Brands on Aug. 15, 2018.
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So what
Rumors of potential deals come and go. However, it makes sense that Diageo would be seriously looking to team up with a major Canadian cannabis producer. The cannabis-infused beverage market could be a big opportunity, as evidenced by Constellation Brands's eagerness to fork over billions of dollars to Canopy Growth.
The problem for investors, though, is that it's impossible to know if a deal will happen, when a deal will happen, and (most important) with which company Diageo would partner. As for when an agreement could be finalized, BNN Bloomberg's report cited one source who said that it "may take months," while another stated that a deal could be more imminent. In other words, there's no clarity whatsoever.
Which Canadian marijuana grower is most likely to impress Diageo? Again, it's hard to say. Aphria's chief commercial officer, Jakob Ripshtein, worked with Diageo from 2011 through April 2018. Ripshtein served as CFO of Diageo North America and president of Diageo Canada. Perhaps his connections with his former employer give Aphria an edge.
Cronos Group and Tilray also have plenty to offer, though. All three companies are currently leaders in the Canadian medical cannabis market. They all have significant production capacity as well. Aphria, Cronos, and Tilray also are competitive in international medical cannabis markets, notably including Germany.
Of course, Diageo could also be eyeing other candidates. Aurora Cannabis, for example, currently ranks second to Canopy Growth in terms of market cap. The company has already stated that it plans to develop cannabis-infused beverages.
Now what
Assuming Diageo does actually choose a cannabis partner, the details of any agreement will be important. If the company follows in the footsteps of Constellation Brands with a significant strategic partnership, it should provide a big boost for the share price of the marijuana grower it selects.
In the meantime, though, investors can only guess what will happen. It's better to make any buy decisions on the fundamentals and likely growth prospects for the companies outside of any potential agreements with a large third party.
It's also important to keep in mind that the valuations of Aphria, Cronos Group, and Tilray already reflect tremendous growth expectations. Each of these three companies has made well below $30 million over the last 12 months, yet all of them currently claim market caps of at least $2 billion. Canada's opening of its recreational marijuana market in October should fuel growth for all three companies, but there's a long way to go to justify current valuations for these stocks.
