Hydropothecary Molson Coors JV Should Come as No Surprise

The Hydropothecary Corporation (TSX:HEXO) is set to form a joint venture with Molson Coors Canada to develop non-alcoholic, cannabis-infused beverages

SmallCapPower | August 3, 2018: The Hydropothecary Corporation (TSX:HEXO) Wednesday announced an agreement with Molson Coors Canada, the Canadian business unit of Molson Coors Brewing Company (NYSE:TAP), to form a Joint Venture to pursue opportunities to develop non-alcoholic, cannabis-infused beverages for the Canadian market following the legalization of consumable cannabis, which is expected to be legally permissible in Canada in 2019.

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The structure of the Joint Venture is such that both Molson Coors and Hydropothecary Corporation will form a standalone start-up company with its own board of directors and an independent management team. The ownership structure will consist of Molson Coors Canada having a 57.5% controlling interest in the JV, with HEXO having the remaining ownership stake. Both companies bring a unique skill set to the table as Molson Coors has abundant experience in the Canadian brewing market and Hydropothecary is a recognized innovator in the fast-growing cannabis space.

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While many cannabis industry commentators seemed surprised by Molson Coors Canada’s decision to partner with Hydropothecary, over larger industry players such as Aurora Cannabis Inc. (TSX:ACB) and Aphria Inc. (TSX:APH), the choice should have been obvious. Molson Brewery was founded in Montreal and has been brewing beer there since 1786. Hydropothecary, meanwhile, has its operations in Quebec and is expected to supply the province with 20,000 kg of cannabis in 2018, making it the market share leader in Québec (approximately 35% share). Quebec is seen as a preferred jurisdiction to grow cannabis in Canada, as it has low electricity rates (due to its abundance of hydroelectric power) and provincial government support for Quebec-based businesses.

Hydropothecary CEO and Co-Founder Sebastien St-Louis commented, “HEXO continues to lead the way for smoke-free cannabis innovation in Canada. We are excited about this partnership with Molson Coors Canada, an iconic leader in adult beverages, as we embark on the journey of building a brand new market. With this new company, we are bringing together Quebec’s oldest, most established company with one of its newest success stories in a truly innovative partnership. As two leading companies who share a track record of excellent practices, as well as respect for law and regulations, HEXO and Molson Coors Canada have established a relationship built on trust, and together we will develop responsible, high-quality cannabis-infused beverages for the consumable cannabis market in Canada.”

The closure of this transaction is targeted to happen before September 30, 2018, and is subject to the satisfaction of certain conditions, including execution and delivery of various transaction agreements, including governance documents, R&D and supply agreements. In connection with the closing of the transaction, subject to the final approval of the Toronto Stock Exchange, Hydropothecary will issue to Molson Coors Canada warrants to purchase shares of HEXO.

The Hydropothecary Corporation trades at market capitalization of $932.69 million with price to book multiple of 2.98x. The Joint Venture with Molson Coors Canada, should it come to fruition, is expected to have a material impact on Hydropothecary and is in line with its plans to garner a strong foothold in the smoke-free cannabis space. Post the announcement, the shares of HEXO climbed 11% to close at $4.83 on Wednesday.

Disclosure: Neither the author nor his family own shares in any of the companies mentioned above.

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