In roughly six and a half weeks, the day that Canadian Prime Minister Justin Trudeau, cannabis enthusiasts, and investors have long waited for will finally be here. On Oct. 17, the proverbial green flag will wave, allowing recreational marijuana to go on sale in licensed dispensaries throughout Canada. Though we've witnessed plenty of state-level expansion in the U.S., and observed roughly 30 countries pass medical cannabis laws, this legalization will redefine the weed industry... as well as add billions of dollars in annual revenue.
Beer makers want a taste of the cannabis industry's growth potential
But, truth be told, there's been more buzz surrounding potential Big Alcohol and cannabis partnerships over the past two-plus weeks than there's been chatter about the Oct. 17 legalization date.
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Much of the excitement surrounds the announcement in mid-August that Constellation Brands (STZ 0.46%), the company behind the Corona and Modelo beer brands, would be making a $3.8 billion equity investment into Canopy Growth Corp (CGC +3.36%), pushing its ownership stake in the company up to 38%.
For those unaware, this is actually the third time Constellation has made a direct or indirect investment into Canopy Growth. In late October, it gobbled up a 9.9% equity stake for what amounted to about $190 million. Then, in June, it purchased a third of Canopy Growth's 600 million Canadian dollar convertible debt offering. These notes can be converted into shares of common stock, thereby increasing Constellation's equity stake. Lastly, there's the most recent equity stake (the purchase of 104.5 million shares of Canopy's common stock), which also comes with 139.7 million warrants, which, if exercised, could push Constellation's stake to north of 50%.
On Aug. 1, we also learned about Molson Coors Brewing selecting Hydropothecary Corp as its joint venture partner for cannabis-infused beverages. With declining beer market share in Canada, as well as sluggish sales, Molson Coors has to do something to stay competitive. Partnering with Quebec-based Hydropothecary might do the trick.
Which pot stocks will be next to partner with Big Alcohol?
The question is, with so many other large alcohol names out there, which marijuana stock could be next to find a partner? My belief is that the following three pot stocks have the best shot of partnering with Big Alcohol.
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The Green Organic Dutchman
Probably the biggest shock here is that Aurora Cannabis, the marijuana grower with the largest expected output at peak capacity of any pot stock (570,000 kilograms), isn't on my list. That's because Aurora is laser-focused on the medical cannabis market, which makes it less likely to focus on recreationally oriented products, like infused beverages.
Instead, I believe The Green Organic Dutchman (TGODF +0.00%) could be the likeliest of all marijuana stocks to find a partner next.
To begin with, The Green Organic Dutchman looks as if it'll be the fourth-largest cannabis producer at peak capacity. After three announcements in a period of 13 days in June, the company upped its peal production capacity from 116,000 kilograms a year to 195,000 kilograms annually, when fully ramped up. That's more than enough production to lure a large alcohol company into a partnership.
But what's even more of a giveaway, in my opinion, was the company's announcement on June 21 (part of its three announcements in a span of 13 days) that it was building a 287,245-square-foot facility on its Valleyfield, Quebec, property that would be dedicated to its beverage division. Mind you, edibles and cannabis-infused beverages won't be legal when Oct. 17 rolls around. Parliament is expected to take up debate and amend the existing law to allow these forms of consumption next year, but nothing is guaranteed. Nevertheless, with TGOD, as the company is also known, devoting slightly over 20% of its peak production to beverages, it's bound to get the well-deserved attention of Big Alcohol.
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Tilray
If not TGOD, my next-best guess would be that newly public Canadian grower Tilray (TLRY +0.00%) would find a partner.
On July 19, Tilray became the first Canadian-based marijuana stock to go the initial public offering route on a reputable U.S. exchange. By pricing 9 million shares at $17, it raised a whopping $153 million in gross proceeds. And let's be honest, it's going to need them.
According to Tilray's prospectus, it has four properties -- three of which are grow farms -- that should, in aggregate, span 912,000 square feet by year's end. Of this, a little over 850,000 square feet will be growing capacity, which could likely yield around 75,000 kilograms annually, in my best estimate. However, Tilray has the funds and land to quadruple its production capacity, which should, by the end of the decade, probably push Tilray to 150,000 kilograms of annual production, if not higher. That's more than enough production to get on Big Alcohol's radar.
Perhaps more important is the fact that Tilray is operating in 11 countries and five continents worldwide, and was one of the first medical cannabis companies in Canada to be issued a cultivation license. It has experience within the industry, as well as the global infrastructure to be a valuable partner to Big Alcohol.
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Aphria
If not TGOD or Tilray, then my third likeliest selection for an alcohol-cannabis partnership would be with Ontario-based Aphria (NASDAQOTH: APHQF).
Like the other growers listed above, Aphria is expected to generate a lot of marijuana each year. In fact, it's projected to slot in ahead of TGOD and behind Canopy Growth Corp into third place, with 255,000 kilograms of annual peak production. This would certainly be more than enough annual yield to attract a large alcohol company.
What would likely make Aphria so attractive to Big Alcohol is its international reach, as well as its desire to focus on alternative cannabis products.
When Aphria acquired Nuuvera earlier this year in one of the largest marijuana acquisitions in history, it did so not to boost its production capacity. Instead, Nuuvera granted Aphria access to a multitude of new markets where it was set to operate. Aphria's access to roughly a dozen countries could be enticing to an alcohol company.
Plus, Aphria announced on June 6 that it planned to construct a state-of-the-art extraction center in Ontario that would sell cannabis concentrates. Since dried cannabis has demonstrated the potential to be commoditized in states like Colorado, Washington, and Oregon in the U.S., Aphria is choosing to diversify its production portfolio to include a number of alternative products. Cannabis-infused beverages would be a logical addition to that portfolio.
Which pot stock will be next? Only time will tell.
