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Cannabis seedlings at a Tilray grow-op in Nanaimo, B.C.John Lehmann

Part of cannabis and investing

The world’s largest brewer, Anheuser-Busch InBev SA/NV, is making a bet on cannabis, partnering with Canadian marijuana firm Tilray Inc. to develop cannabis-infused beverages.

Labatt Brewing Company Ltd., AB InBev’s Canadian subsidiary, and Tilray will each contribute up to US$50-million to a joint venture focused on researching tetrahydrocannabinol (THC) and cannabidiol (CBD)-infused drinks, the companies said on Wednesday. The partnership will be limited to Canada at first, where marijuana edibles, including beverages, are expected to become legal next fall.

“Labatt is committed to staying ahead of emerging consumer trends,” Labatt president Kyle Norrington said in a statement. “We look forward to learning more about these beverages and this category in the months ahead.”

AB InBev and Labatt’s move into cannabis comes amid a rapid change in the drug’s legal status both in Canada and around the world. Over the past year, incumbent alcohol, tobacco and pharmaceutical companies have become increasingly interested in marijuana, both as a growth opportunity and as a hedge against disruption to their traditional businesses.

“Just as medical patients are substituting medical cannabis for prescription painkillers, it’s likely that consumers are substituting cannabis for alcohol. We don’t know how big it will be, but it’s going to be much bigger than it is today,” Brendan Kennedy, chief executive of Nanaimo, B.C.-based Tilray, said over the phone.

Well-capitalized Canadian marijuana firms have become the favourite targets for multinational companies looking for exposure to the industry, as Canada is the only large country to have legalized cannabis at a national level. U.S. beer and wine maker Constellation Brands Inc. invested $5-billion in Canopy Growth Corp. in August. Marlboro cigarette maker Altria Group Inc. followed suit in December, investing $2.4-billion in Cronos Group Inc.

The partnership between AB InBev/Labatt and Tilray does not involve an equity stake, and looks more like the joint venture between Molson Coors Brewing Co. and Hexo Corp. That deal, announced in August, is also focused on developing and commercializing cannabis-infused beverages, and Molson Coors did not make a direct investment in Hexo.

"It’s early days, and for us research feels like the right place to start. … We’re not interested in being bought or acquired,” Mr. Kennedy said.

The deal comes a day after Tilray announced an international partnership with Sandoz AG, a subsidiary of the pharmaceutical giant Novartis International AG. The companies plan to sell co-branded, non-combustible cannabis products in medical markets around the world, building on an earlier partnership between Tilray and Sandoz Canada.

Tilray’s relationship with AB InBev came together over the course of multiple meetings over the past 12 months, Mr. Kennedy said. Tilray wasn’t the only cannabis company with whom the Belgian brewer was speaking, he said. As The Globe and Mail first reported in August, AB InBev, along with other beverage makers such as Pernod Ricard SA, Heineken Holding NV, Coca-Cola Co. and Diageo PLC, has been making the rounds, speaking with Canadian licensed producers and touring their facilities.

“We met with the team from Anheuser-Busch InBev in Seattle, in Denver, in New York, in Nanaimo, in Toronto, with various team members across their entire organization," Mr. Kennedy said.

The new joint venture, which has yet to be named, will be based in Tilray’s High Park manufacturing facility in London, Ont. Labatt was founded in London and still has facilities in the city.

Much of the research will focus on developing drinks with rapid onset effects, Mr. Kennedy said. The biggest challenge infused-beverage makers face is how long it takes the body to absorb THC delivered in an edible form. This problem needs to be solved for cannabis drinks to compete with beer in social settings.

While the partnership is Canada-focused, Mr. Kennedy isn’t ruling out international expansion: “Right now there’s essentially one large adult-use market in the world, but we know there will be more, whether it’s Mexico or New Zealand, countries that are looking at adult-use [cannabis legalization]. … But whether or not we enter other geographies, that’s really a decision for a future date."

Tilray, which is majority-owned by U.S. private equity firm Privateer Holdings, has facilities in British Columbia, Ontario and Portugal, and ships medical products to 12 countries. The company exploded into public consciousness this summer when its share price rocketed from US$17 to US$300 after going public on the Nasdaq exchange, briefly surpassing Canopy Growth as the most valuable marijuana company in the world. By early this week, Tilray shares had declined below US$70, but saw a 16-per-cent jump on Tuesday following the Sandoz announcement.

AB InBev shares have been in steady decline for several years, losing more than 30 per cent in value this year alone amid slowing sales and changing consumer tastes.

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