Coca Cola + Aurora: Another BIG Cannabis Deal Coming?

Imagine you’re the senior executive of some large, multinational beverage manufacturer. Your own sales have flattened out. You don’t see any obvious means to boost revenues substantially. Then along comes cannabis.

Cannabis is non-toxic and non-addictive. New “infusion technology” is making it possible to add cannabinoids (the active ingredients in the cannabis plant) to both foods and beverages – with research making steady strides on both the bioavailability and efficiency of such cannabis infusion.

Then there are the existing consumer beverages. Alcohol is toxic and addictive. It is also a Class I carcinogen. But carbonated beverages are hardly any better. Consumers have long been aware of the enormous calorie content of these beverages. However, research is steadily uncovering a long list of additional health perils attached to soda drinks.

Then there are cannabis-infused beverages.

For the alcoholic beverage market, THC-infused cannabis beverages provide consumers with a non-toxic/non-addictive recreational drug option that also excludes all of the other deleterious factors associated with alcohol use. Cannabis has virtually unlimited potential to claim market share here.

For the soft drinks market, CBD-infused cannabis beverages can provide a beverage option that also can confer health benefits. As research into medicinal applications for cannabis continues to deepen, more and more focus is centering around the health benefits of CBD (cannabidiol).

This brings us to the Rumor of the Day in the cannabis market: a potential deal between Coca Cola Co. and Aurora Cannabis Inc. (TSX: ACB). While a Coca Cola official has issued a statement saying that management “have no interest in marijuana or cannabis”, this news is being widely reported in North America (BNNBloomberg, CBC, Financial Post, and Reuters).

While Coca Cola’s stock price has risen steadily in recent years, it is certainly not a reflection of earnings. Coke’s EPS peaked in 2013 and has been flat-to-lower ever since. The present valuation represents another U.S.-listed bubble stock that is trading at current levels purely on the basis of media hype.

Then there is the deal between Constellation Brands and Canopy Growth: the huge CAD$5 billion investment in WEED that has raised Constellation’s total stake in Canopy Growth to as much as 38%. That deal was based upon a stock price of $48.60 for WEED, and at the time Canopy Growth was trading at just over $32.

Today, only a month after the strategic investment was announced, Canopy Growth has risen to $63.17 – and this is substantially off of the all-time high of $74.45 that WEED hit at the beginning of September. This means that for beverage giants considering entering the cannabis sector, time is of the essence. Someone seeking to negotiate a similar deal with Canopy Growth today would have to spend $6.5 billion for the same stock purchased by Constellation for $5 billion a month earlier.

If there are negotiations actually taking place, clearly Coca Cola has a vested interest in squelching such rumors. With a new cannabis rally already underway in the sector, doing anything to fuel these rumors would only send Aurora’s share price even higher. Even with the denial from Coke, ACB is up almost 17% on the day.

From a financial perspective, there are many reasons to treat the denial from Coca Cola with skepticism. Apart from the mediocre financial performance of Coca Cola, demographics are working against the company. The United States is the biggest market for Coke products, but it also represents one of the world’s most-obese, least-healthy populations.

So-called “diet sodas” are not the answer to these endemic American health issues. New research is emerging that drinking diet sodas leads to weight gain – not weight loss. Coca Cola’s line-up of existing carbonated products is being steadily filtered out of the spending habits of health-conscious consumers.

For similar reasons, the beer beverage giants have also seen sales flatten out. Further comprising alcohol consumption, alcohol is “contra-indicated” for hundreds of different pharmaceutical products, i.e. consuming alcohol creates enormous additional health risks (beyond cancer and addiction). As prescription drug use soars in North America – and especially the United States – more and more consumers are forced to shy away from alcoholic beverages. Cannabis presents no such risks.

This leads to perhaps the most interesting aspect to this new rumor involving Coca Cola’s possible entry into the cannabis-infused beverage market. If Coca Cola is pursuing a move into the cannabis-infused beverage market, what side of this market is Coke planning on entering?

The history of the Coca Cola Company is a story about which many consumers are completely unaware. The “coca” in Coca Cola comes from its (former) use of leaves of the coca plant as one of the soft drink’s original ingredients. The coca plant is the source of cocaine. From 1886 – 1929, Coca Cola had varying amounts of cocaine in it – at a time when cocaine was legal and considered to be a medication.

Following 1929, Coca Cola replaced the use of coca leaves (and cocaine) with caffeine, which is also a recreational drug in its own right. So, if Coca Cola chooses to enter the cannabis-infused beverage space, is this strategy to be geared toward the production of soft drinks, or will it (once again) compete in the recreational beverage market against alcoholic beverage companies?

The communal consumption of beverages is an intrinsic part of human socializing, hardly surprising for organisms that are comprised of roughly 60% water. But the beverages that people consume the most in social settings (apart from water or coffee) tend to be very unhealthy for us. Especially in an age of soaring prescription drug use, cannabis-infused beverages are a potentially revolutionary alternative to existing beverages.

The alcoholic beverage market is a $1 trillion per year revenue pie. Global carbonated soft drinks are a greater than $400 billion per year market.

With roughly $1.5 trillion per year in revenues up for grabs in those two markets, cannabis companies already active in the infused-beverage space are extremely enthusiastic about their marketing potential. For the manufacturers of alcoholic and carbonated beverages, cannabis-infused beverages represent an enormous, looming threat.

The “solution” for multinational beverage companies like Constellation Brands, Molson Coors, and Southern Glazer’s is to get in now. And apart from the latest rumor surrounding Coca Cola, other beverage giants have also been rumored to be ready to make a move here – with UK giant Diageo one of the most recent companies to attract such speculation.

As the cannabis industry continues to expand, part of this expansion involves taking market share from established companies and industries. The alcoholic beverage sector and the carbonated beverage sector are two of the industries that are most-vulnerable to lose market share to cannabis-infused products.