One of the most significant themes of 2020 has been the cannabis beverage market and this is a vertical that we are bullish on. We have seen an uptick in M&A activity, with the 9 figure acquisition of Sweet Water Brewery most recently.
Several big alcohol brands have taken a hard look at the cannabis beverage vertical and many of these large alcohol companies have acquired assets or partnered with cannabis beverage businesses. By taking this course of action, these large alcohol companies have determined that the vertical that has substantial growth potential.
From a demand standpoint, we expect to see similarities between the cannabis beverage market and the hard seltzer market over the long-term. We believe the market is discounting the growth prospects that are associated with cannabis beverage vertical and want to highlight 3 operators that are expected to be beneficiaries of the trend.
Cannabis Beverages has made HEXO a Turnaround Story
One of the biggest surprises of 2020 was the advancement of the relationship between HEXO Corp. (TSX: HEXO) (NYSE: HEXO) and Molson Coors (TAP.CN) (TAP). In late 2018, the companies formed a strategic partnership and many analysts started to wonder if anything positive would come out of this relationship.
Earlier this year, HEXO and Molson announced the formation of Truss Beverages to capitalize on the cannabis beverage vertical and we are impressed with how the relationship has advanced so far this year. Currently, HEXO is selling tetrahydrocannabinol (THC) infused Truss Beverages in Canada and cannabidiol (CBD) infused beverages in the US.
Over the long-term, we believe that the brand is well positioned to capitalize on a change in legislation in the US and can modify its facility to allow for the production of THC infused beverages when the time comes. We are favorable on the long-term opportunity for Truss Beverages and believe that HEXO is well positioned to increase its market share of the global cannabis beverage market through its relationship with Molson.
One of the reasons we are favorable on the relationship with Molson Coors is related to the amount of infrastructure that it has. From an expansion standpoint, the existing infrastructure will make it much easier for HEXO to capitalize on new market opportunities sand we will monitor how the story advances in 2021 and beyond.
BevCanna: An Undervalued Cannabis Beverage Growth Story
A few weeks ago, BevCanna Enterprises Inc. (CSE:BEV) (OTC: BVNNF) (FSE: 7BC) reported a major development as it relates to the cannabis beverage market and signed a letter of intent to acquire Naturo Group Investments Inc (Naturo). The acquisition builds on a multi-year exclusive partnership between the companies and we are favorable on the growth potential that is associated with the combined company.
We consider BevCanna to be an emerging play on the cannabis beverage market and believe that the opportunity is flying under the radar. We believe the acquisition of The Naturo Group will prove to be a transformational acquisition for the company and believe that the market is discounting the potential that is associated with the combined company.
Naturo’s leading brand, TRACE is considered to be a leader in the Canadian plant-based mineral beverage category and health and wellness space, and their products are available in more than 3,000 Canadian retail stores. Currently, TRACE is in discussions with operators internationally that could become strategic international partners and we are favorable on the potential that is associated with this.
In 2021, Naturo plans to execute on a US expansion strategy and we expect BevCanna to play an important role in this. In Canada, the company develops and manufactures beverages and consumer products for in–house brands and white label clients. The types of retailers that sell Naturo products in Canada include 7/11, Loblaws, London Drugs, Metro and Farm Boy, and we are favorable on the existing distribution that the brand has.
Once the transaction is completed, Naturo and BevCanna will become a full vertically integrated health and wellness company with multiple revenue streams outside of just Cannabis beverages, and we expect to see the management team find significant synergies between the two businesses. Due to the existing relationship between BevCanna and Naturo, we expect the transition to be seamless and consider this to be an important aspect of the story.
Through a master license agreement that was part of the exclusive partnership, BevCanna has access to Naturo’s 40,000 sq. ft. state-of-the-art beverage manufacturing facility. The facility is on a 315-acre property and is strategically located on an alkaline spring water source. We are favorable on value of the property and addition of hard assets in the company due to the potential for outdoor cultivation purposes and find this to be an attractive aspect of the story.
The acquisition represents a step forward for the combined company and has formalized the relationship in a way that combines the key strengths of each operator. From a valuation and growth standpoint, we believe that the combined company is more valuable than the sum of its parts and are favorable on potential impact the transaction will have on profit margins.
Earlier this year, an independent financial firm assigned Naturo an enterprise value that is between $38 million and $42 million (CAD). The firm came to this number by assigning a $10.4 million valuation to the property, a $3.4 million valuation to the beverage manufacturing equipment, and an $18 million valuation to the exclusive onsite alkaline spring water source.
As part of the proposed business combination, BevCanna will take ownership of Naturo’s flagship brand, TRACE. The brand is an attractive aspect of the Naturo story and we will monitor how it performs under the combined company. We expect the brand to benefit from the resources that are owned by the combined company. From a partnership standpoint, we expect BevCanna and Naturo to create new revenue streams, identify synergistic opportunities, and cut costs for the combined company.
From a cost cutting and synergy standpoint, the agreement will eliminate future payment liabilities that are associated with BevCanna’s current lease agreement, royalty agreement and manufacturing agreements with Naturo. This change will preserve future working capital and allow BevCanna to direct more resources towards the advancement of its operation. We expect the acquisition to have an immediate positive impact on BevCanna and improves its ability to create shareholder value.
From a growth standpoint, TRACE is expected to support growth through the expansion of its product selection. On top of its alkaline and sparkling waters, the branded products will include nutraceuticals and TRACE is executing on a strategy that will incorporate additional nutraceuticals and herbal remedies in several key markets.
One of the reasons we are bullish on the acquisition is related to the human capital that is associated with it. The management team of the combined company has decades of expertise in the field of consumer-packaged goods (CPG), capital markets, corporate strategy, and public markets.
The combined company is expected to be one of the largest CPG, cannabis beverage, and natural products businesses. From a timing standpoint, we believe that BevCanna’s management team took a patient approach toward inorganic growth. Now that BevCanna is selling products in the US and is on the 99-yard line as it relates to the commercialization of products that will be sold in Canada, the company is reaching an inflection point and we believe the acquisition will help turn the business into a leading cannabis beverage operator.
Canopy Growth: A Canadian Cannabis Beverage Leader
Although we are favorable on the potential for companies like HEXO and BevCanna, Canopy Growth Corporation (WEED.TO) (CGC) is considered to be a leading cannabis beverage company and has the most market share in Canada.
A few years ago, Constellation Brands (STZ) invested approx. $4 billion in Canopy Growth and this transaction proved to be a catalyst for the entire cannabis industry. Constellation a multi-national alcohol conglomerate that owns brands like Corona that is expected to be a beneficiary of the legal cannabis movement through its investment in Canopy Growth.
The road to profitability has not been easy for Canopy Growth and most of the management team that founded the company have been fired. These executives have been replaced by executives from Constellation Brands and we expect these new additions to play an important role in the success of Canopy Growth’s cannabis beverage division.
In 2021, we expect Canopy Growth to record strong growth on the cannabis beverage side of the business. During this time, we expect the company to launch additional cannabis beverage products that are infused with wither CBD or THC (or both in Canada). Similar to HEXO, we expect Canopy Growth to expand into the US once cannabis is legalized at the federal level and find this to be an attractive aspect of the long-term story. Going forward, we expect the market to be highly focused on the cannabis beverage aspect of Canopy Growth’s business and is an operator that we will continue to closely follow.