In the long-rumored battle between Aphria Inc (TSE:APH) (OTCMKTS:APHQF) (FRA:10E), Hydropothecary Corp (TSE:HEXO) (OTCMKTS:HYYDF) and others vying to secure a Molson Coors Brewing Co (NYSE:TAP) courtship, a winner has been decided. HEXO has emerged victorious, cementing a joint venture (JV) partnership with the iconic brewer. Further details and commentary follow.
The somewhat shocking news occurred early this morning, as both Molson Coors Canada and HEXO agreed to create a JV focused on non-alcoholic, cannabis-infused beverages for the Canadian market. The JV will be structured as a standalone start-up company, governed with independent board of directors and management teams. Molson Coors will maintain a 57.5% controlling interest, with HEXO owning the rest (42.5%). Specific financial transaction details weren’t disclosed, but HEXO will issue an undisclosed amount of common share warrants to the brewmaster. The entity is expected to be finalized by September 30, 2018—subject to regulatory and inter-company transaction agreements.
For Aphria investors—and Midas Letter—the news comes as somewhat of a surprise. Although we were the first news organization to ponder whether Hydropothecary and Molson Coors would make ideal dance partners in May, the trail had grown silent of late.
Further misdirection was brought about by a June 22nd BNN Bloomberg Report suggesting that Molson Coors had held conversations with several LPs about possible collaboration on future cannabis-infused beverages. Aphria was one of two specifically-mentioned suitors.
Admittedly, the circumstantial evidence looked strong on Aphria’s behalf. Some wondered whether Aphria’s $55 million state-of-the-art Extraction Center of Excellence was being built for a designed purpose; there were odd dual June 6 trading halts which coincided with the company’s $225 billion bought deal financing. There was Molson’s admission that cannabis posed a “risk factor” to its operating model, and mainstream analysts—inadvertently or not—making overt connections between the two. And let’s not forget the hiring of Joel Toguri as V.P. of sales—a former Molson Coors executive with deep industry roots.
Aphria CEO Vic Neufeld offers suggestion as to why Molson Coors talks fell through. (Live in studio, August 1st, 2018 – [0:32])
It turns out they did—just not in the direction Aphria investors were hoping for.
Two Noteworthy Takeaways From Today’s HEXO Deal
Outside of the obvious fact that Molson Coors chose its racehorse today, two other finer points stand out.
The first is that Molson Coors elected to focus on the non-alcoholic market to start. While this fact may surprise some, it makes perfect sense from a business perspective. Considering how regulated both alcohol and cannabis are individually, it seems unlikely the government will fast-track such hybrid products right away. Molson may be aiming to pluck the low-hanging fruit first (non-alcoholic beer, energy drinks) and focus on hybrid beverages later. That could be the fastest path to market.
Secondly, today’s announcement came on the same day Aphria that announced Q2 earnings. Surely, Molson Coors would have known that announcing the deal today would provide sour optics for Aphria, and completely upstage their Q2 earnings report.
As such, I hypothesize that there was some sort of self-imposed timeline between all parties involved. Something akin to all parties (LPs) presenting their best JV cases, with the winning suitor declared by a set deadline (August 1st). Perhaps Aphria even amended their earnings release schedule in July as a show of bargaining table virtue signalling, with the consolation prize being a harmonized reporting schedule if the deal fell through. Perhaps Vic Neufeld can rebut or confirm this line of reasoning in a future Midas Letter interview.
Either way, today’s conclusion didn’t work out in Aphria’s favor. With their $55 million SOTA extraction facility not coming online until March 2019, there will be plenty more opportunities for the company to meet its match.
In the end, a Molson Coors/LP consummation was destiny in the making. The iconic brewmaster faced a future of stagnant-to-declining unit sales if it chose to stand pat. Diversifying into cannabis beverages was the right and logical choice, considering how consumer recreational tastes have evolved over the decades. Come Q1 2019, HEXO can provide the low-cost supply capacity needed to allow Molson Coors to compete on scale and price—assuming cannabrew becomes a “thing”. Both companies have sweeping operations in Quebec, where extensive collaboration will be necessary. The deal is structured very favorably (majority share, low equity risk) for the brewmaster.
For it’s part, HEXO gains an experienced CPG operator and long term off-take partner for their cash crops. They also obtain access to an advanced and worldwide distribution channel serving consumer markets it seeks to enter. It’s the type of broadening reach the company sought after having cemented a lucrative, long term off-take agreement with SAQ in April.
We congratulate both companies for coming together in a deal which makes too much sense not to happen. The dominoes did indeed fall—just in a way most weren’t expecting.
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