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Beer Makers Are Drunk on Marijuana's Potential

Sean Williams, The Motley Fool

In less than two months, Canada will make history. Following months of debate in Parliament and years of promises from Prime Minister Justin Trudeau, recreational marijuana will officially be legal and go on sale in licensed dispensaries as of Oct. 17, 2018. This makes Canada the first industrialized country in the world to greenlight the sale of adult-use cannabis.

Of course, this is more than just a moral victory for pot enthusiasts. When legalized, marijuana sales are expected to soar. While estimates tend to vary wildly, as you'd expect from an industry that's never been legalized in a developed country before, sales of the drug could hit somewhere in the neighborhood of $5 billion. For context, the Canadian weed industry is only generating $200 million a year right now from the sale of domestic medical marijuana and via exports.

This expected surge in sales is the primary reason why Wall Street and investors have pushed the valuations of marijuana stocks through the roof in recent years. But Wall Street and retail investors aren't the only ones to take note of marijuana's astounding growth rate.

A brewer holding a pint of beer and carefully examining it.

Image source: Getty Images.

This equity stake proves beer makers' commitment to the cannabis industry

Since October 2017, beer manufacturers have been nothing short of drunk on the potential of the legal cannabis industry -- and if you don't believe me, take a gander at the latest equity stake announced between Corona beer owner Constellation Brands (NYSE: STZ) and the largest marijuana stock by market cap, Canopy Growth Corp. (NYSE: CGC).

For context, the two have been tied at the hip since late October, when Constellation announced that it would take a 9.9% equity stake in Canopy Growth. When announced, the deal was worth about $190 million and provided Canopy with much-needed capital that it used to expand its growing capacity and construct greenhouses in British Columbia.

Even more recently, when Canopy Growth offered 600 million Canadian dollars ($456.5 million) worth of convertible debt, Constellation Brands gobbled up a third of it, or a little over $152 million. If this convertible debt is turned into common stock, it would allow Constellation Brands to increase its stake in the company (albeit, adding new common stock via the convertible note would modestly dilute its original stake). 

Then, on Wednesday, the market got word that Constellation was done dipping its toes into the water and was ready to dive in headfirst. As announced via a joint press release between the two companies, Constellation is taking a CA$5 billion ($3.81 billion) additional equity stake in Canopy Growth, which raises its ownership in the company to 38% of outstanding shares. In aggregate, Constellation is acquiring 104.5 million shares of Canopy at a 51.2% premium to its closing price on the Toronto Stock Exchange as of Aug. 14.

A tipped over jar filled with trimmed cannabis lying atop a small pile of cash.

Image source: Getty Images.

What's more, Constellation will receive 139.7 million new warrants as part of the deal, which become exercisable over the next three years. Assuming Constellation exercises these options, even with the dilutive effect of adding new shares to the outstanding total, its ownership stake in Canopy could exceed 50%.

What's the buzz all about?

Interestingly enough, Canopy Growth notes in the press release that its "Canadian platform doesn't require additional cannabis cultivation assets." This is the first time we've heard a marijuana grower admit that it's done expanding its growing capacity, at least for the time being. Then again, with 5.6 million square feet of eventual licensed capacity -- which should translate to around 500,000 kilograms of yearly production, by my best guess -- Canopy isn't exactly lagging its peers in the capacity department.

Rather than expanding its capacity, Canopy plans to use the capital it's raised, which pushes its total cash balance to in excess of $4 billion, to "strategically build and/or acquire key assets needed to establish global scale in the nearly 30 countries pursuing a federally permissible medical cannabis program."

Comments from Canopy Growth's co-CEO Bruce Linton also are telling about the company's future. Said Linton: "Constellation's concentration of global cannabis activities exclusively through Canopy, coupled with the investment and its expert capabilities in brand-building, marketing, consumer insights and M&A [mergers and acquisitions] will be a huge benefit as we look to expand our portfolio in Canada, the United States and emerging cannabis markets around the globe."

A judge's gavel next to dried cannabis buds.

Image source: Getty Images.

Despite both companies being unwilling to push into the U.S. as long as the federal government keeps its Schedule I classification on the drug, Linton's acknowledgement that the company is looking to expand its portfolio into the U.S. is telling. It suggests that the duo views the U.S. as a massive opportunity and believe that federal change may be on the horizon.

In addition to both companies likely working on developing a line of cannabis-infused beverages -- cannabis-infused beverages won't be legal in Canada until Parliament gives them the green light, likely by next year -- Constellation will use its marketing expertise and infrastructure to push Canopy's product line into new markets. 

Deals are brewing in the cannabis space

However, Constellation's equity stake in Canopy Growth is far from the only deal brewing between beer companies and pot stocks.

A few weeks ago, Molson Coors Brewing (NYSE: TAP) announced that it was forming a joint venture with Quebec-based Hydropothecary Corporation (NASDAQOTH: HYYDF), which has previously estimated its peak annual production at 108,000 kilograms of cannabis. Under terms of the joint venture, Molson Coors will own 57.5%, with Hydropothecary owning the remainder.

The joint venture between Molson Coors and Hydropothecary is expected to focus on developing cannabis-infused products -- specifically, beverages. Again, while these beverages won't be legal by Oct. 17 in Canada, it isn't stopping Molson Coors or Hydropothecary from working together to create products that could be launched if and when Parliament gives them a green light.

For Molson Coors, the deal was a no-brainer. It's seen steady declines in its Canadian beer-market share over the past decade, as well as sluggish sales throughout the U.S. and Canada. The fast-growing marijuana industry is, to a number of beer makers, a potential lifeline.

A bottle of wine next to a potted cannabis plant.

Image source: Getty Images.

At the end of July, Heineken also introduced a cannabis-infused, non-alcoholic beverage known as Hi-Fi Hops through its wholly owned craft brewery, Lagunitas. Currently, the beverage is on sale at only a select number of locations in California. 

Meanwhile, one of the biggest names in the industry, Anheuser-Busch InBev (NYSE: BUD), which is ironically toting around the ticker symbol "BUD," has decided not to partake in cannabis acquisitions or partnerships for the time being. In an interview with Just-Drinks.com back in June, Anheuser-Busch InBev CEO Carlos Brito had this to say:

Cannabis is something that we as a company are trying to learn more about. It's going to be regulated. It's going to be commercialized. But it's still a very restricted business and, in most places, it's not legal... We'll continue to follow it, but for now, we don't feel we need to do anything. 

This certainly is an interesting perspective from Anheuser-Busch InBev, given that its top line is expected to be essentially flat in 2018, according to Wall Street estimates, and grow by just 3% in 2019.

Chances are better than not that we haven't seen the last of these brewer-backed equity stakes in cannabis companies. The only question is: Will these partnerships pay off or fizzle out over the long run?

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Sean Williams has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Anheuser-Busch InBev NV. The Motley Fool owns shares of Molson Coors Brewing. The Motley Fool has a disclosure policy.