Just in time for the legalization of recreational cannabis in Canada, Molson Coors Canada - the Canadian wing of Molson Coors CompanyTAP , and cannabis producer - The Hydropothecary Corporation ("HEXO"), closed their joint venture ("JV") announced on Aug 1, 2018. As already known, the JV will explore opportunities to produce non-alcoholic cannabis-infused drinks, which will be sold in Canada - Molson Coors' key market.
The JV, which will be known as Truss, will operate as a stand-alone company with its own board and an independent management team. Molson Coors Canada will own 57.5% controlling interest in the JV, with HEXO having the remaining 42.5% stake. It will be headed by Brett Vye, former executive of Molson Coors, acting as the CEO. The board of directors will include three members from Molson Coors Canada and two from HEXO. Brett Vye will directly report to the board of directors.
As part of the transaction, HEXO issued 11,500,000 warrants to Molson Coors Canada. Each of these warrants can be exercised to buy a common share of HEXO, for an exercise price of $6, in the next three years.
The new establishment will explore opportunities in the fast-growing consumable cannabis market as Canada is legalizing trade later this month. The company will combine the expertise of Canada's leading brewer and a popular innovator - Molson Coors - in the fast-growing cannabis sector. This new venture is consistent with Molson Coors' growth strategy and commitment of being the First Choice for consumers by ensuring that Canadians easily get their hands on high-quality products that live up to their evolving drinking preferences.
Further, the JV is likely to aid Molson Coors' sales graph, which suffers due to softness in the beer industry as consumers' shift to healthier drinking options.
Molson Coors' shares remain static, following the news. However, this Zacks Rank #3 (Hold) stock witnessed significant declines due to continued soft beer volume and sales in the United States, owing to challenging industry trends. The stock declined 13.1% in the last three months, wider than the industry 's 6.5% fall.
The marijuana (or Cannabis) industry has recently been attracting beverage makers in the United States as it provides an opportunity to replenish their struggling sales charts. Increasing popularity of cannabis-infused drinks, in contrast with huge decline in demand for beer and sugary sodas, is probably the key reason for the beverage companies' interest.
Traditional beverage companies - alcohol and soft drinks - witnessed terrible declines in their product sales lately due to the shift of consumer preference toward healthier options. Notably, the alcohol segment is suffering due to lesser demand for beer. On the other hand, sugary sodas have been witnessing declines as consumers prefer non-carbonated and health drinks.
These factors have left both alcohol and soda makers scramble for options to meet changing consumer preference. On the one hand, soft drink biggies like PepsiCo PEP , Coca-Cola KO and Keurig Dr Pepper KDP have been venturing to add drinks like juices, coffee, flavored water, sparkling water and others to their portfolio. Similarly, beer makers are concentrating on introducing flavored varieties with low-alcohol content, and diversifying their portfolio by including non-alcoholic beverages and energy drinks.
Beverage-Cannabis Ventures So Far
With the new wave of cannabis-infused drinks, we have seen some interesting tie-ups by U.S. beverage giants - mostly alcohol, and Cannabis companies. In addition to Molson Coors-HEXO, Corona beer maker Constellation Brands STZ invested additional $4 billion in Canopy Growth Corp. CGC for 38% stake in Canopy. Moreover, Heineken HEINY launched Hi-Fi Hops, a cannabis-infused sparkling water, in California. We also saw Coca-Cola exploring the cannabis-infused functional wellness drinks market in September.
Undoubtedly, Cannabis emerged as an attractive alternative to problems faced by players in the U.S. beverage space, given medicinal value of the drug. This makes the marijuana market a great investment option for traditional beer and soda firms as Canada is likely to become a big market soon.
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