Part of cannabis and investing
Geoff Molson, you’re a heartbreaker.
A number of marijuana company CEOs felt jilted in early August when the heir to more than two centuries of brewing tradition concluded a widely followed search for a partner in the market for cannabis-infused beverages by announcing a joint venture between Molson Coors Brewing Co. and Hydropothecary Corp., based in Gatineau, Que.
By all accounts, disappointment was particularly acute in the head office of Aphria Corp., a well-established medical marijuana producer that created considerable buzz in July by delaying the announcement of quarterly financial results to a mid-August date that coincided with the scheduled release of Molson Coors' earnings. There is widespread speculation Aphria pitched hard to be Molson Coors' partner.
Disappointment is likely to be a familiar feeling in the cannabis sector when it comes to takeover speculation. Share prices are rising for almost all Canadian-listed marijuana producers, in part on expectations of a wave of inbound offers from beverage, pharmaceutical and tobacco companies. Molson Coors' venture with Hydropothecary and Constellation Brands' recent $5-billion investment in Canopy Growth Corp., the country’s largest cannabis producer, are seen as a sign of things to come.
Reality may not match the current exuberance. It’s clear that beverage industry leaders such as Anheuser-Busch InBev and Diageo PLC will keep pace with rivals by rolling out strategies for cannabis in cans and bottles. It’s far less evident that these global players, along with drug and cigarette companies, need to acquire Canadian cannabis companies to achieve their goals.
Step back and consider the dynamics of the emerging recreational cannabis market. No one has developed a strong brand around drinkable marijuana — there’s no Budweiser of weed. The chemistry involved in creating beverages, or edible cannabis products, is straightforward. That means there’s no opportunity to grab dominant market share or intellectual property by acquiring a cannabis company. These are factors that typically drive takeovers.
While Molson Coors and Constellation opted to invest in cannabis producers, rivals may decide it’s cheaper and more effective to grow their own line of products with in-house research and development, or wait for the market to shake out and acquire a dominant cannabis beverage.
Consider as well the risks that come when a global company opts to invest in recreational cannabis, a drug that is still illegal under U.S. federal law and has long been distributed by criminals. Deals done to date — at Canopy Growth and Hydropothecary — involved exhaustive due diligence by the buyers; lawyers who worked on the Constellation investment say heart transplant surgery involves less scrubbing of facilities and data.
This level of scrutiny is familiar ground for Canopy Growth co-CEO and chairman Bruce Linton, a former tech executive who learned how to build companies under telecom entrepreneur Terry Matthews. Mr. Linton has sold businesses to the likes of Microsoft, and prepped Canopy Growth for the international stage from the day he launched the business in 2012.
Not every cannabis company has this kind of pedigree. Many went public through reverse takeovers, rather than more scrutinized initial public offerings, and feature long-time backers from the same crowd of stock promoters that gave junior mining companies their checkered reputation.
Reputation is also an issue for companies such as Aphria, where senior executives made headlines in March by popping up as significant personal shareholders in a company they targeted in a takeover, Nuuvera Inc. That’s the kind of deal-making that raises eyebrows at image-conscious global companies.
There will be more takeovers rocking the cannabis sector. The global market for recreational and medical marijuana is in its infancy, and Canadians are leading players. But only a handful of domestic cannabis companies will end up with partners in the dance with beverage, drug and cigarette companies, and many will be wallflowers.