Molson Coors Canada (TSX:TPX.B)(NYSE:TAP) is one of Canada’s most iconic companies. It’s known as a beer stock, but the company could transform into a cannabis stock with a well-timed acquisition in 2020.
Molson Coors was formed in 2005 by the merger of Molson of Canada and Coors of the United States, making it the world’s seventh-largest brewer. But its roots stretch back much further. Molson was founded in 1796 in Montreal, Quebec, making it North America’s oldest brewer and the second-oldest company in Canada.
In 2005, shares were priced at $40. In 2016, they peaked at $150. Then the hard fall came. Over the past four years, Molson Coors shares have declined back to $55. What happened?
The need is clear
In 2007, SABMiller and Molson Coors combined their U.S. operations in a joint venture called Miller Coors. In 2016, Molson Coors purchased SABMiller’s stake in the venture for US$12 billion, granting it full control over the Miller brand portfolio. This was a huge mistake.
With craft brewing and other forms of alcohol gaining in popularity, big beer brands like Miller, Coors, and Molson were shedding market share. Molson Coors was stuck with a $12 billion purchase tag, which included billions in debt, yet the business it bought was shrinking.
Molson Coors’s entire market cap today is $8.3 billion, representing an incredible destruction of shareholder value in just four years. The company needs a lifeline. It needs a source of growth other than its shrinking beer portfolio.
If you connect the dots, it’s clear that Molson is ready to make a game-changing acquisition. But saddled with debt, it can’t afford a multi-billion-dollar move. That’s what makes the latest cannabis bear market so attractive. Cannabis stocks that used to have billion-dollar valuations now trade at pennies on the dollar.
Molson Coors already has the trust of Canadians, and its presence in the quickly evolving pot sector could be transformational. But which pot stock could it acquire? The choice is obvious.
This cannabis stock is ready
Hexo (TSX:HEXO)(NYSE:HEXO) is the perfect acquisition candidate for Molson Coors. The entire company trades at a $430 million price tag, despite fetching a multi-billion-dollar valuation in 2018.
The marijuana bear market of 2019 crushed cannabis stocks, but demand growth is still strong. In 2016, Cowen estimated pot demand would grow from $6 billion to $50 billion by 2026. In 2018, it upped its guidance to $75 billion in sales by 2030. Months later, it raised its forecast again to $80 billion in sales. By the end of 2019, the forecast jumped to $85 billion.
Cannabis stocks are cheap. Molson Coors can capitalize on short-term pain by making an affordable bet that could give it a reliable growth driver for another decade or more.
But why Hexo? It’s because the companies already work together.
It’s not well publicized, but Molson Coors and Hexo already have a joint venture to co-produce cannabis-infused beverages. Its first products hit shelves early this year. The original joint venture began over one year ago, so the companies are very familiar with each other.
Molson Coors has proven willing to buy partners out of a joint venture before, as was the case with SABMiller. This joint venture makes even more sense, as the purchase price would be 30 times smaller. Yet the upside, especially in terms of revenue growth, could be much higher.
The need for Molson Coors to turn around its business is clear. The Molson-Hexo connection is even clearer. Don’t be surprised to see Molson Coors make the jump in 2020, completely acquiring Hexo’s cannabis operations.
