You can add The Boston Beer Company (NYSE: SAM) to the list of major alcohol conglomerates to become levered to the cannabis industry.
Through a product development agreement with Peak Processing Solutions, a subsidiary of Althea Group Holdings (ASX: AGH), and WeedMD Rx Inc., a subsidiary of Entourage Health Corp (TSX Venture: ENTG) (OTCQX: ETRGF), Boston Beer will be positioned to capitalize on the burgeoning cannabis beverage market and we are favorable on the development for the entire cannabis sector.
Under the product development agreement, Peak will provide research and development services including laboratory support and the testing of various product formulations and recipes, for a new line of cannabis beverage products.
According to a five year supply and manufacturing agreement between the companies, Peak will be the exclusive manufacturer of all cannabis beverages that are produced or sold in Canada under Boston Beer’s branding.
An important clause of the agreement is related to how Peak will have the right of first refusal for the US market in the form of a potential future partnership. We consider this to be an important aspect of the arrangement as the US cannabis market represents a major long-term growth opportunity.
As part of the agreement, Boston Beer with provide up to $2 million (USD) for capital improvements that are associated with the development project. These type of expenses include the construction and furnishing of laboratory facilities as well as additional production equipment at Peak’s facility.
On top of the $2 million, Peak will also receive at least $500,000 (USD) for the enhancement of its beverage manufacturing capabilities. Peak will also receive at least $285,000 (USD) for each year of the agreement (totaling $1.42 million) and we are favorable on the capital structure of the arrangement.
Entourage will play an important role in the performance of the cannabis beverage brand in Canada and will be responsible for the distribution and sale of the cannabis-infused beverages across the country. The Canadian Licensed Producer (LP) will purchase the finished products from Peak and will leverage its sales force and sales licenses to capitalize on the burgeoning vertical of the industry.
We believe the agreement will result in the development of a cannabis beverage brand that could capture significant market share in the countries where the products are available. We expect Peak and Entourage to immensely benefit from the brand power the Boston Beer Company has and will monitor how the teams are able to execute on this opportunity.
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