What a difference a year makes.
Although much progress was being made within the pot industry, recreational weed was illegal in Canada at this time last year, hemp was illegal in the United States, and the U.S. Food and Drug Administration (FDA) had never approved a cannabis-derived drug. Now, each and every one of those statements is false, with Canada legalizing adult-use marijuana in October, President Trump signing the Farm Bill into law in December, and the FDA approving cannabidiol (CBD)-based oral solution Epidiolex in June. CBD is the nonpsychoactive cannabinoid best known for its perceived medical benefits.
The validation that the marijuana industry has enjoyed has led to an abundance of dealmaking, some of which has come as a surprise.
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A number of surprising deals take shape in the cannabis arena
For example, it was expected that brand-name beverage, tobacco, and pharmaceutical companies would be considering the legal cannabis industry for partnership or equity investment opportunities if Canada gave weed the green light. But what surprised a lot of folks was Molson Coors Brewing's choice to form a joint venture with Quebec-based HEXO in August to develop a line of cannabis-infused beverages. Nothing against HEXO, but it wasn't exactly considered a prominent grower at the time the deal was announced. Even with 108,000 kilograms in peak annual production expected, HEXO may not even crack the top 10 in terms of the country's largest growers. HEXO landing a deal with Molson Coors was genuinely surprising.
Also a bit shocking was the December deal that saw Anheuser-Busch InBev and Tilray form a joint venture for cannabis-infused beverages. The deal, which'll see each party put $50 million toward the joint venture, isn't that out of the ordinary. What's surprising is how quickly Anheuser-Busch CEO Carlos Brito went from pumping the brakes to flooring the gas pedal on cannabis.
But of all the deals to really catch Wall Street off guard, it might be shoe retailer DSW's (DSW 3.52%) recent announcement that it was partnering up with Green Growth Brands (GGBXF +0.00%) to sell CBD-rich topical creams, muscle balms, and body lotions. Green Growth Brands recently completed a reverse takeover of Xanthic Biopharma to become a public company.
The agreement will see Green Growth's Seventh Sense line of CBD topicals placed into 96 U.S.-based DSW stores. In total, it encompasses just shy of 55,000 units of CBD topicals. This deal comes after a pilot program saw 74% of Green Growth's products in 10 DSW stores sell in just a 10-week period, which was far and away beyond expectations for both companies. Said Green Growth Brands' CEO Peter Horvath, "[This] is the first step in our strategy to expand sales of personal care CBD products through external partnerships, in mall kiosks, and through a growing number of stores and online."
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Here's why DSW's foray into cannabis isn't all that shocking
While it might sound weird for designer shoe retailer DSW to be breaking into the cannabis area, a deeper dive reveals that this move is less than shocking.
Cannabis companies, with increasing frequency, have been turning to former executives from the retail and beverage industries to validate their business models and provide guidance. These newly added chess pieces also happen to serve as links to their former industries, creating opportunities to push into new sales channels.
Suffice it to say, it's no secret that DSW and Green Growth Brands shook hands earlier this month. You see, Green Growth CEO Horvath was once the president of DSW, between January 2005 and June 2008. Though a "president" is responsible for all facets of a business, Horvath's background has always been in improving operations and merchandising. He knows DSW's successes and failures from a product perspective inside and out, and his 3.5-year tenure with the company provided the perfect link for Green Growth to snag a major supply deal with a brand-name company. Growing favorability toward cannabis in the U.S., coupled with high-margin complementary add-on products for both parties to benefit from, made this deal a shoo-in (pardon the pun).
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More deals are coming, and you might be able to predict them
Of course, this is unlikely to be the last deal in which an executive's or advisor's previous work history creates an opportunity for the cannabis industry. For instance, embattled grower Aphria (APHA +0.00%) added Tom Looney to its board of directors late last year. Looney has been a fixture in the alcohol beverage industry for 30 years -- an industry that Aphria would love to penetrate by finding a partner.
More specifically, Looney had been the president of Diageo's (DEO 0.65%) U.S. Spirits and Canada division. Interestingly enough, Diageo was a big name rumored to be looking for a cannabis partner last summer. Clearly there are obstacles, such as Aphria's foundation being rocked by a co-authored short-sellers report, but a bridge clearly exists between Diageo and Aphria that could be facilitated by Looney.
However, to be crystal clear, a possible deal doesn't mean there will be a deal. Nor does it mean you should invest in any marijuana stock solely on account of expecting a deal to be made. An equity investment, partnership, joint venture, or sales agreement is simply icing on the cake to a pot stock's longer-term strategy -- and don't forget it.
Check out the latest DSW earnings call transcript.
