Diageo plc (DEO) Latest in Value Catalyst Cluster Driving Cannabis Stocks

I reached out to Diageo plc (NYSE:DEO) Canada CFO Ricardo Barrios in July 2017, asking him if he or his board were interested in pursuing a relationship with a cannabis start-up I was involved with at the time. He declined to answer my query, but the news that Diageo is now nearing some kind of transaction obviously comes as no surprise to us.

What I sincerely hope, for both Diageo and whoever is revealed to be the lucky winner of the golden ticket, is that the transaction is not a toothless nothing burger like the deal between Hydropothecary and Molson Coors. I do hold open the possibility that something might yet materialize in that realm that will prove worthwhile to shareholders of HEXO for the free carry on 11.5 million shares of dilution. But the opposite is equally likely, in my view.

With speculation rampant now as to who the contenders are, Aphria Inc. is among the leading, since Jakob Ripshtein, former CFO of Diageo North America and former president of Diageo Canada Inc. is now Chief Commercial Officer at Aphria.

One overlooked candidate that is probably one of the most attractive to a potential acquirer based on valuation is CannTrust, whose well-oiled machine has been quietly amping up production in a very disciplined and methodical manner.

Our thesis at Midas Letter has always been, that the prolonged downturn of the summer – due entirely to Muskoka fever, as a cannabis company CEO recently coined it – would be reversed by a series of post summer catalysts. The Hexo-Coos yawn was rather spectacularly eclipsed by the near-takeover of Canopy Growth by Constellation.

Diageo’s hat toss into the cannabis ring has the potential to drive the market higher, even as the apparent momentum still sending WEED shares higher shows signs of correcting in the near term. It also has the potential to single-handedly torpedo the impetus with a candy floss deal.

Either way, I think we can safely expect that any puffball transaction will only serve Canopy’s interest in demonstrating that whereas they and their new best friend Constellation have gone all in on their shared cannabis future convincingly, me-too’s might not be able to muster the financial clout of the STZ transaction.

And really, when you stand back and contemplate the Constellation acquisition of Canopy (that is, after all, what it really is, more or less), you can’t help but admire the genius of the mutual-valuation-driver structure of the deal. Canopy is now driving Constellation’s value, while Constellation drives Canopy’s valuation. That reality means Constellation will have no issue securing the first $5 billion (Bruce Linton’s words) or any subsequent B-word number.

With the frenzy of cannabis stocks now reaching a fever pitch, the onus will be on the corporate negotiators to execute intelligent, well thought-out transactions that are accretive to both parties.

More Cannabis Stocks

• Aurora Cannabis Snags MedReleaf in $3.2 Billion Deal
• HEXO Price Momentum Wanes As Post-Deal Reality Becomes Apparent
• The Hydropothecary Corp Wins Molson Coors Partnership for Cannabis Beer
• Aphria Inc Selects Beverage Executive As Vice President of Sales

Original article: Diageo plc (DEO) Latest in Value Catalyst Cluster Driving Cannabis Stocks

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