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Frederic Landtmeters, Molson Coors Canada president and CEO (left) and Sébastien St. Louis, The Hydropothecary Corporation (HEXO) co-founder and CEO.Daniel Alexander Denino

Molson Coors Canada, the country’s second-largest brewer by volume, has found its way into the cannabis sector.

The Toronto-based beermaker has agreed to partner with Gatineau, Que.-based marijuana grower Hydropothecary Corp. to launch a new joint venture that will develop cannabis-infused beverages that are non-alcoholic, the two companies said Wednesday. Molson will own 57.5 per cent of the new entity and control three seats on its board of directors, while Hydropothecary will own the rest and control the other two board seats.

Additional financial details weren’t disclosed in the press release and executives at both companies wouldn’t elaborate on the deal in an interview. The transaction is expected to close before Sept. 30 and will also see Hydropothecary, which is now branding itself as Hexo, issue warrants to Molson to buy shares in the cannabis cultivator.

On Wednesday afternoon, a spokeswoman for Molson said that the warrants can convert to 11.5 million shares of Hydropothecary at a strike price of $6 apiece. The warrants expire in three years and come at no cost to Molson, the spokeswoman added by e-mail. If Molson exercised its warrants when the stock was trading at $6.01, it would own about 5 per cent of Hydropothecary.

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The joint venture will mark the entry of a marquee and deep-pocketed Canadian beverage company into the nascent legal-marijuana industry, which is vying to be taken more seriously by the broader public ahead of Ottawa’s plans to legalize the recreational use of marijuana on Oct. 17. Beverages won’t be permitted initially in Canada, but could be as early as 2019.

“It’s a growth opportunity," Frederic Landtmeters, chief executive officer of Molson Coors Canada, said by phone.

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The transaction is expected to close before Sept. 30 and will also see Hydropothecary, which is now branding itself as Hexo, issue an undisclosed number of warrants to Molson to buy shares of the cannabis cultivator.Ivanoh Demers/La Presse

"We believe that 1 plus 1 is 3 in a sense that our expertise in the brewing industry for a long, long time and the expertise of Hexo in the cannabis industry is the most powerful combination to go to market in a successful way in a new space.”

Shares of Hydropothecary have tumbled nearly 20 per cent in the past month, but jumped 4 per cent in the last 10 minutes of Tuesday’s session. Shares of Molson Coors Brewing Co., the brewery’s parent, have lost 25 per cent in value in the past year.

Hydropothecary’s stock spiked on Wednesday, soaring 13 per cent to $4.93 at 11:13 a.m. ET in Toronto. Molson’s shares in New York were up a modest 1.5 per cent in early trading.

Molson’s foray into cannabis comes less than a year after U.S. wine- and beermaker Constellation Brands bought a minority stake in industry leader Canopy Growth Corp., which sparked a stunning rally in pot stocks broadly. Last week, The Globe and Mail reported that Canopy’s rival Aurora Cannabis Inc. had been in talks with Steam Whistle Brewing and has made no secret of its desire to create weed-infused drinks.

Canadians, for their part, are drinking less beer. We each pounded back an average of 75.5 litres of pilsner, ale and lager last year, down 2.1 per cent from the previous year, according to Beer Canada. Molson hasn’t been spared by the broader trend: Its sales, volume and pretax income in Canada are declining, while its costs were up in its last reported quarter ended March 31.

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Molson will own 57.5 per cent of the new entity and control three seats on its board of directors, while Hydropothecary will own the rest and control the other two board seats.Ivanoh Demers/La Presse

“Consumer needs and preferences are evolving and we need to evolve our portfolio to address those needs and preferences," Mr. Landtmeters said. “The insights that we have about our consumers reach beyond beer. Our expertise is in branding, innovation and commercializing these products."

The alcohol industry is also warning about the possibility of legal cannabis taking a bite of their sales, as marijuana use becomes more mainstream and new products are developed.

Mr. Landtmeters says all types of non-alcoholic beverages are on the table for the joint venture, including juices, water, coffee and sports drinks, but stressed that Molson and Hydropothecary won’t be mixing beer and bud.

“It’s about public health and making sure that cannabis and alcohol don’t mix,” said Sebastian St-Louis, Hydropothecary’s chief executive. Mr. Landtmeters added: “We were very keen to enter the cannabis space in a responsible way. Hexo is buying into that thinking 100 per cent."

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Legal pot is expected to mean even less demand for a cold one: Alcohol sales have fallen in U.S. states that legalized recreational marijuana, such as Colorado and Oregon.Ivanoh Demers/La Presse

Molson Coors Canada is the Canadian arm of Colorado-based Molson Coors Brewing Co. The cannabis initiative is being spearheaded out of Canada. Mr. Landtmeters says they pitched the idea to the parent company’s board and it was approved. “We are going to operate in Canada and only in Canada,” he added.

Molson and Hydropothecary are now looking to hire a CEO and appoint the board of their joint venture. The management team will be able to define their strategy and product mix, says Mr. Landtmeters, adding that both companies will be able to “focus on their core businesses in the meantime.”

In recent weeks, two sources told The Globe and Mail that Hydropothecary has been shopping for a buyer.

“We are not looking for a buyer, although everything is always for sale," Mr. St-Louis said. “But there are no current conversations around selling Hexo.”

Follow Christina Pellegrini on Twitter: @chris_pelleOpens in a new window

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