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The Other Marijuana Stock on Coca-Cola's Radar Not Named Aurora Cannabis

Sean Williams, The Motley Fool

In exactly four weeks, history will be made in our neighbor to the north. Following the passage of the Cannabis Act in June, recreational marijuana will go on sale to adults aged at least 18 or 19 (depending on the province) as of Oct. 17, 2018. And with this new era of legalization being ushered in, marijuana stocks are soon expected to be rolling in the dough.

Partnerships take precedence in the cannabis space

But legalization is far from the only thing that's on the minds of investors. With the capacity expansion phase winding down, all eyes are now being turned to brand building and product differentiation. Not surprisingly, we've witnessed a major uptick in brand-name deal announcements since the beginning of August.

Two businessmen shaking hands, as if in agreement.

Image source: Getty Images.

For instance, Molson Coors Brewing Co. announced the formation of a joint venture with HEXO Corp. on Aug. 1. The duo will primarily be working on nonalcoholic, cannabis-infused beverages, using Molson's marketing expertise and infrastructure and HEXO's knowledge of the marijuana industry. Interestingly, only dried cannabis and oils are going to be legal when the green flag waves on Oct. 17, meaning other forms of consumption, including infused beverages, would have to wait for clearance from Parliament, which is expected to occur sometime next year.

Last month also saw Constellation Brands announce its intent to sink $3.8 billion more into Canopy Growth Corporation. Inclusive of its convertible notes, the maker of the Corona and Modelo beer brands has directly or indirectly invested more than $4.1 billion into Canopy Growth, and now has a pathway to become a majority stakeholder in a few years' time.

Coca-Cola has real interest in cannabis-infused beverages

However, the marijuana industry really bubbled over with excitement when it was announced by numerous news outlets on Monday, Sept. 17, that Coca-Cola (NYSE: KO) is considering partnering with Aurora Cannabis (NASDAQOTH: ACBFF) to make cannabidiol (CBD)-infused beverages. CBD is the non-psychoactive cannabinoid that's best known for its perceived medical benefits. Though neither company would comment on the rumors, a tie-up would certainly have its perks.

Aurora Cannabis is currently slated to be the largest producer in Canada, with an estimated 570,000 kilograms of peak production. Keep in mind that this doesn't count what ICC Labs could bring to the table when Aurora's $221 million acquisition of the company closes. Aurora has more than enough production potential to attract a major partner like Coca-Cola.

A Coca-Cola truck parked on the street out in front of businesses.

Image source: Coca-Cola.

Aurora also has a keen focus on the medical side of the industry, as opposed to recreational. It's actually a smart move, despite the smaller patient pool. That's because medical patients are more likely to use alternative products, such as oils and infused beverages, which carry considerably better margins than the highly commoditized dried cannabis.

As for Coca-Cola, entry into the cannabis space through CBD-infused beverages would give it a genuine opportunity to move the needle, especially in North America and Europe. This is important, as North America was the only region to report an organic sales decline during the second quarter. 

This marijuana stock may still be on Coke's radar

Though a tie-up between Coca-Cola and Aurora would seem entirely logical, it's probably not the only company on the beverage giant's radar.

According to BNN Bloomberg, Ontario-based Aphria (NASDAQOTH: APHQF) was, at one time, the apple of Coke's eye. A source familiar with the matter notes that Coca-Cola held talks with senior management at Aphria a few months ago, but that no agreement was reached. The thing is, Aphria has just as much of a pedigree as a partner as Aurora Cannabis does. 

Although Aphria won't be the top dog in terms of annual production, its estimated 255,000 kilograms when at full capacity should be good enough for third-highest in Canada.

A person holding cannabis leaves in their cupped hands.

Image source: Getty Images.

Additionally, Aphria has made it a point to emphasize production differentiation through the use of cannabis alternatives, such as oils. In June, the company announced it would be spending 55 million Canadian dollars to construct an extraction center in Leamington, Ontario. This center will focus on cannabis concentrates, but could probably just as easily be repurposed for a joint venture with Coca-Cola, should the opportunity arise. 

Through its acquisition of Nuuvera earlier this year, Aphria also has exposure to around a dozen markets worldwide, which more or less matches Aurora Cannabis.

Even though discussions didn't result in a partnership a few months prior, I don't believe the door is necessarily closed on Aphria tying up with Coca-Cola. After all, Aphria has yet to land a major partner in the beverage, tobacco, or pharmaceutical industry.

While it's impossible to predict what'll happen next in the ever-changing cannabis space, Aphria is certainly a name to keep an eye on as dealmaking continues to ramp up.

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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.