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3 Reasons an Aurora Cannabis-Coca-Cola Tie-Up Would Make Perfect Sense

Sean Williams, The Motley Fool

The landmark day for Canada is now less than a month away. On Oct. 17, Canada will lift the curtain on recreational marijuana, allowing the drug to be legally purchased by adults in licensed dispensaries. In doing so, it'll be opening the door to what could be $5 billion (or more) in added annual sales once the industry is fully ramped up.

The launch of adult-use weed hasn't been the primary buzz around the pot industry of late, however. Instead, it's been the rush of announced and rumored deals between marijuana stocks and larger businesses in the alcohol, tobacco, and pharmaceutical space.

A potted cannabis plant next to a bottle of wine.

Image source: Getty Images.

Dealmaking takes precedence in the cannabis space

At the beginning of August, Molson Coors Brewing Co. (NYSE: TAP) announced that it was tapping into the cannabis market by forming a joint venture with HEXO Corp. (previously known as Hydropothecary). This joint venture would allow Molson Coors and HEXO to collaborate on cannabis-infused beverages, once such beverages are given the green light by Canada's Parliament, which is expected to happen sometime next year. With Molson Coors witnessing its beer market share declining in Canada, and HEXO looking to diversify its product line and gain brand relevance, the deal made sense for both parties.

Then came Constellation Brands' (NYSE: STZ) head-turning equity investment in Canopy Growth Corp. (NYSE: CGC) in mid-August. Having already taken a 9.9% equity stake worth approximately $190 million at the time in October 2017, and then acquiring a third of Canopy Growth's 600 million Canadian dollar convertible note offering in June, Constellation Brands announced its intent to invest $3.8 billion in the company. If approved by regulators, the producer of the Corona and Modelo beer brands will hold a 38% stake in Canopy, with the option of increasing that stake to north of 50%, inclusive of its already-held convertible notes and 139.7 million warrants that are part of the equity investment. The duo are expected to work together on infused beverages, among other products.

Following these deals, Wall Street and investors have been abuzz as to which pot stock is next. The recently public Tilray, for example, has risen more than 650% since pricing its shares on July 18 prior to its initial public offering. The reason? While there are many, the biggest just might be speculation around a big alcohol or tobacco deal.

Yet, it's not Tilray that looks to land the next major marijuana agreement. Instead, it might be Aurora Cannabis (NASDAQOTH: ACBFF).

Two friends clanking their bottled Coca-Cola beverages together prior to taking a sip.

Image source: Coca-Cola.

Here's why a Coca-Cola-Aurora infused-beverage partnership makes sense

As reported on Monday, Sept. 17, beverage giant Coca-Cola (NYSE: KO), which already owns over 500 brands, is in serious talks with Aurora Cannabis to develop a line of cannabidiol (CBD)-infused beverages. CBD is the nonpsychoactive cannabinoid best known for its perceived medical benefits. Although neither company would confirm the rumors, which were based on multiple anonymous sources familiar with the matter, Aurora has previously noted its interest in entering the infused-beverage space, and Coca-Cola has previously shown interest in investing in CBD-infused beverages. A few months ago, it held discussions with Aphria, though the talks never materialized into a deal, according to BNN Bloomberg.

Though a deal is far from a certainty at this point, there are three reasons why a Coca-Cola-Aurora Cannabis tie-up would make perfect sense. 

1. Aurora is (likely) the top dog when it comes to production

The most logical reason for Coca-Cola to consider Aurora is that it's probably going to be the top producer among Canadian growers.

Following the closure of its MedReleaf acquisition in July, Aurora's management team estimated that its annual production, once at full capacity, could top 570,000 kilograms. Mind you, this figure doesn't include the acquisition of ICC Labs announced last week. Once this buyout is complete, and ICC Labs' existing projects are finished, it may be possible for Aurora to push as high as 700,000 kilograms in annual production. Or, in other words, Aurora Cannabis has more than enough capacity to make a deal with a beverage giant like Coca-Cola happen.

A tipped over bottle of dried cannabis lying on a doctor's prescription pad.

Image source: Getty Images.

2. Aurora's focus is on the medical side of the equation

Secondly, whereas quite a few Canadian producers are angling to be major players in the recreational weed market when Oct. 17 hits, Aurora Cannabis is almost exclusively focused on the medical side of the equation. This means handling medical marijuana needs domestically in Canada, but even more so meeting the demand needs of the more than two dozen foreign countries that've legalized medical cannabis in some capacity.

Cannabidiol beverages would specifically be targeting the medical market, which would align perfectly with Aurora's focus, as well as keep Coca-Cola out of the thick of the cannabis movement (i.e., dried flower and tetrahydrocannabinol (THC), the psychoactive cannabinoid of the cannabis plant that gets you "high"). Interestingly, not all countries that've passed broad-based medical marijuana laws have given the green light to smoking dried cannabis. But they've almost universally approved CBD oils. This suggests the consumption of infused-beverages would likely be OK'd as well.

3. Coca-Cola needs answers to slowing soda sales

Lastly, Coca-Cola needs to find a way to reignite growth after years of stagnant soda sales in key markets. For example, despite reporting an organic increase in sales of 5% during the second quarter, Coca-Cola recorded a 1% organic sales decline in its key North American market. Brewing concerns over sugar content in sparkling beverages, when combined with America's obesity epidemic, has made life difficult for the cola giant in recent years.

A smart way for Coca-Cola to tackle its North American growth demons would be to turn to the fast-paced cannabis industry. With access to Canada, and likely most of Europe (which is where many of the medically legal countries are), Coca-Cola should be able to generate needle-moving organic growth within a few years.

Plus, infused beverages (and practically any cannabis alternative product, for that matter) have juicier margins than traditional dried cannabis, which is prone to commoditization over the long run.

Whether a partnership comes to fruition remains to be seen, but there are certainly plenty of reasons to believe it will.

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Sean Williams has no position in any of the stocks mentioned. The Motley Fool owns shares of Molson Coors Brewing. The Motley Fool has a disclosure policy.