Molson Coors Bets on Pot With Cannabis-Drink Joint Venture

(Bloomberg) -- Molson Coors Brewing Co. is betting on pot by starting a joint venture with Hydropothecary Corp. to develop non-alcoholic, cannabis-infused beverages for the Canadian market.

The partnership between Molson Coors Canada and Quebec-based cannabis producer Hydropothecary will be structured as a standalone company with its own board and management team. A chief executive officer will be named in the coming weeks.

“We decided entering the cannabis space would provide us with a real growth opportunity,” Frederic Landtmeters, CEO of Molson Coors Canada, said in a phone interview. After talking with several potential partners, Molson Coors chose Hydropothecary because of its research and development capabilities, its loyal customer base and its strong brand, he said.

The partnership is a first for a major brewer with operations in Canada, where recreational marijuana will become legal on Oct. 17. Though cannabis-infused edibles and beverages won't initially fall under the provisions of the law, Molson and Hydropothecary expect those products will become legal sometime in 2019.

‘Trend-Setting'

“We view this as a historic milestone as the Canadian cannabis industry looks for innovative ways to enter the beverage industry,” Beacon Securities analyst Douglas Cooper said in a note. “We expect today's Hexo/Molson Coors Canada JV to be nothing short of trend-setting for the cannabis industry as a whole.”

Hydropothecary CEO Sebastien St. Louis said the potential market size for cannabis beverages is “staggering.” He said the deal with Molson Coors will give his company, which is renaming itself HEXO Corp., the opportunity to be a first mover.

“They're bringing capability as a Fortune 300 company that quite frankly no cannabis company even comes close to replicating,” St. Louis said.

Hydropothecary jumped 15 percent to C$4.89 at 2:02 p.m. in Toronto, while Molson Coors Canada stock rose 5 percent.

Mainstream Interest

Molson Coors will have a 57.5 percent stake in the company and three board seats, while Hydropothecary will hold the remaining stake and two board seats. The transaction is expected to close before the end of September. As part of the deal, Hydropothecary will issue warrants that give Molson the right to purchase 11.5 million shares of the cannabis company at a strike price of C$6 ($4.62) a share.

The deal comes as more mainstream companies are showing interest in the cannabis space. Alcohol giant Constellation Brands Inc., the maker of Corona beer, bought a stake in Canadian pot producer Canopy Growth Corp. last year, and cigarette maker Imperial Brands Plc last month took an equity stake in closely held Oxford Cannabinoid Technologies.

The beer makers might be hedging their bets. Sales of alcoholic beverages declined significantly in states that legalized medical marijuana, according to research by the University of Connecticut and Georgia State University.

Molson Coors Brewing CEO Mark Hunter said the Canadian partnership is an opportunity “to incubate and test” products for other markets, including the U.S.

“We believe potentially it's got really significant potential and we're going to learn a lot,” Hunter said on the company's second-quarter earnings call Wednesday. “If other markets start to open up in due course and this becomes federally legal, then we'll be in a good place at that point in time.”

--With assistance from Janine Wolf.

To contact the reporter on this story: Kristine Owram in Toronto at kowram@bloomberg.net

To contact the editors responsible for this story: Courtney Dentch at cdentch1@bloomberg.net, ;David Scanlan at dscanlan@bloomberg.net, Steven Frank, James Attwood