Get ready for round three of the dating game. Constellation Brands chose Canopy Growth as its cannabis partner. Molson Coors Brewing selected The Hydropothecary. Now it looks like another major alcoholic beverage company is in search of a Canadian marijuana partner.
BNN Bloomberg reported late last week that U.K.-based beverage company Diageo plc (DEO 0.86%), the maker of Guinness beer and Smirnoff vodka, has been in talks with at least three Canadian marijuana growers. No firm details are available at this point. However, several stocks of cannabis producers have soared on speculation that they could be the next to snag a deal.
Which marijuana partner will Diageo actually pick? There's no way to know for sure. My view, though, is that the top three candidates the company should be looking at closely are Aphria (NASDAQOTH: APHQF), Tilray (TLRY +0.00%), and Aurora Cannabis (ACBFF 3.55%). Here's why.
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1. Aphria
Over a week ago, I ranked Aphria as No. 3 on the list to follow in Canopy Growth's footsteps in partnering with a major alcoholic beverage maker. But I have Aphria at the top of the list now. What changed? For one thing, my previous ranking was based on market reaction. More importantly, though, we now know which beverage company is likely to be the next to make a deal.
There are two advantages that I think work in Aphria's favor. One is that Diageo would get a lot of bang for its buck by investing in the company. Aphria's market cap of $2.7 billion is well below the market caps of my other top three candidates. The company expects to have an annual production capacity of 225,000 kilograms by early 2019. Aphria claims a better price per kilogram of capacity than many of its peers.
The other advantage for Aphria is its connection with Diageo. Aphria chief commercial officer Jakob Ripshtein worked with Diageo for 10 years prior to joining Aphria earlier in 2018, serving as president of Diageo Canada for a couple of years prior to joining Aphria. You'd have to think that Ripshtein's relationship with the Diageo management team would help Aphria in partnership discussions.
2. Tilray
Investors have driven Tilray's stock up 84% following the announcement of the Constellation-Canopy deal. My view is that these gains are largely due to the expectation that Tilray will be a top contender for partnering with a beverage company.
Don't underestimate the importance of Tilray's listing on the Nasdaq stock exchange. I think Constellation's $4 billion investment in Canopy caused many U.S. investors who had been on the sidelines with cannabis stocks to pay attention. Other than Canopy, Tilray and Cronos Group (CRON 2.85%) are the only Canadian marijuana producers listed on U.S. stock exchanges. Tilray was a natural stock for U.S. investors to buy. Diageo's management could also prefer to invest in a partner that is already listed on a U.S. stock exchange.
With Tilray, Diageo would get a collaborator with a solid production capacity, who has recreational cannabis supply agreements lined up with several provinces and territories, and who boasts an established international presence -- including a production facility in Portugal.
3. Aurora Cannabis
Aurora Cannabis doesn't have the personal connection with Diageo that Aphria does. It's not listed on a U.S. stock exchange like Tilray is. So, why do I rank Aurora No. 3 on the list of potential partner candidates for Diageo? Capacity, global operations, and vision.
Aurora's total funded annual production capacity tops 570,000 kilograms. And that doesn't include anticipated additional capacity from its stake in The Green Organic Dutchman. Granted, Aurora won't have the full capacity until late 2019, but the company should be able to produce at least 175,000 kilograms per year at the beginning of next year -- a much higher number than most of its peers.
Like both Aphria and Tilray, Aurora claims a strong presence in global medical cannabis markets. The company's Pedanios subsidiary gives it a great foothold in Germany as well as a launching pad for other European markets. I also suspect that Aurora's vision of where the industry is going, especially with cannabis-infused beverages, could align well with what Diageo is looking for.
Other notable candidates
There are two other candidates for Diageo that I think are particularly noteworthy. Cronos Group's share price has soared more than others' since Constellation's investment in Canopy Growth was announced. Its market cap of around $2.1 billion would make a sizable investment more affordable than my top three candidates. However, Cronos' production capacity isn't as great as those of the others mentioned.
It's also possible that Diageo could emulate Molson Coors and go with a smaller partner with a less integrated relationship like the one between Constellation and Canopy. If that's the direction taken, I think Organigram Holdings (OGRMF 1.09%) could be a dark-horse candidate. Organigram's market cap is only around $560 million: not a bad price tag, relatively speaking, for a company with projected annual capacity of 113,000 kilograms by 2020.
Remember that, for now, we only have a rumor of a deal. Diageo could decide to do nothing. My hunch is that we will see an announcement in the not-too-distant future, though. I think there's a really good chance that Aphria, Tilray, or Aurora Cannabis could wind up as Diageo's cannabis partner. And I don't think this will be the last big agreement between an alcoholic beverage company and a Canadian cannabis producer.
