In case you haven't noticed, the secret is out: Marijuana is big business. In just over six weeks, the Canadian government will wave the proverbial green flag on recreational marijuana, allowing the drug to go on sale in licensed dispensaries within the country. When legalized, and the industry is fully operational, added annual sales could near $5 billion, according to some Wall Street estimates.
Big partnerships are brewing in the cannabis industry
However, the legalization of marijuana has gotten the attention of industries beyond just the cannabis space. In particular, alcohol companies are beginning to look to the weed industry as a potentially new growth channel to revitalize sluggish alcohol sales (especially in North America). To date, we've witnessed two tie-ups announced between the alcohol and marijuana industries.
In early August, Molson Coors Brewing (NYSE:TAP) announced that it would be forming a 57.5%-42.5% joint venture with Quebec-based Hydropothecary Corporation, with Molson Coors owning the larger stake. Molson Coors has seen its beer-based market share in Canada decline pretty steadily over the past decade, and its operating results thus far in 2018 have shown a company with a low-to-mid single-digit decline in beer sales in Canada and the United States. By partnering with Hydropothecary, Molson Coors believes it can develop cannabis-infused beverages that'll put some pep back into its top line.
It should be noted that edibles and infused beverages won't be legal come Oct. 17, when recreational sales officially begin in Canada. Parliament is widely expected to discuss (and green light) their legalization in 2019.
The other deal that's really been turning heads is that of Constellation Brands (NYSE:STZ) and Canopy Growth Corp. (NYSE:CGC). Since this deal was announced prior to the market open on Aug. 15, it's sent marijuana stocks as a whole into a frenzy.
Pot stocks soar as Wall Street wonders what company is next to partner with Big Alcohol
For instance, Cronos Group's (NASDAQ:CRON) share price doubled in less than two weeks on the expectations from investors that it would be among the next cannabis businesses chosen by Big Alcohol for a partnership. There is some merit to the speculation given that Cronos somewhat recently announced that, via a joint venture with a group of investors, it would be constructing an 850,000-square-foot facility that, in my estimate, will double its peak production capacity to 140,000 kilograms per year. This makes Cronos one of about 10 to 12 major players in Canada.
Cronos also has a partnership with upscale retail dispensary MedMen Enterprises, which could prove attractive to alcohol companies aiming to get their infused beverages into upscale dispensaries.
Tilray (NASDAQ:TLRY) was another pot stock that catapulted higher, with shares of the newly public company surging 145% over a two-week period since the Constellation-Canopy tie-up was expanded. Tilray was one of the first Canadian growers to receive a medical cultivation license, and therefore is viewed as being one of the most experienced cannabis companies.
It also has a really good shot at eclipsing 100,000 kilograms of annual production in short order. By the end of this year, Tilray's prospectus called for 912,000 square feet of initial development, with more than 850,000 square feet being devoted to growing capacity. It does, however, have the ability to nearly quadruple its growing capacity, which makes it a well-known name with high production potential.
Constellation's partnership with Canopy Growth is truly unique
Yet, what investors might be glancing over is just how different Constellation Brands has approached the cannabis industry than say Molson Coors or Heineken, which recently launched its owned cannabis-infused beverage through its wholly owned Lagunitas Brewing subsidiary. Whereas Molson Coors and Hydropothecary formed a joint venture, and Heineken simply leaned on the expertise of a subsidiary, Constellation Brands has shelled out a lot of money on three separate occasions to become a stakeholder in Canopy Growth's business. In other words, this goes beyond just a business partnership for a few products.
Constellation Brands initially took a 9.9% equity stake in Canopy Growth back in late October 2017 for what amounted to $190 million. At the time it was believed that Constellation, the Corona and Modelo beer producer, and Canopy, would work together on a handful of products to bolster both of their long-term growth prospects.
However, in June and August, Constellation really ramped up its interest. Constellation Brands gobbled up a third of Canopy's 600 million Canadian dollar convertible note offering in June, giving Constellation the opportunity to convert its notes to shares of common stock in the future, and thereby increase its stake in Canopy Growth. Then, of course, the creme de la creme of equity investments on Aug. 15: a $3.8 billion equity stake at what had been a 51% premium to Canopy's prior-day closing price. Along with this most recent investment comes 139.7 million warrants that, should Constellation choose to exercise, could push its stake in Canopy Growth to more than 50%.
This isn't just a partnership. This is a full-fledged push by Constellation Brands into the marijuana industry. It's now invested over $4 billion directly and indirectly into Canopy Growth and therefore sees the legal weed industry as a new way to expand its top and bottom lines. Rather than just focusing on infused beverages, Canopy will lean on Constellation for its infrastructure and marketing expertise as it looks to expand to foreign markets, while Constellation will rely on Canopy's expertise in the cannabis industry.
Sure, new partnerships may be brewing in the cannabis space, but they're unlikely to be anything like what Constellation Brands and Canopy Growth have worked out.