In December of 2018, Health Canada introduced draft regulations governing the production and sale of additional cannabis products, namely edibles, extracts, and topicals (the Cannabis 2.0 regulations). These regulations are set to take effect no later than October 17, 2019 and will introduce notable opportunities for food and beverage companies to enter into strategic partnerships with cannabis industry players.

In a recent report, Deloitte projected that legal, recreational sales are expected to generate up to $4.34 billion in Canada's cannabis market in 2019. Further, Deloitte estimates that six out of 10 likely cannabis consumers will purchase and use edible products. Of the current and likely consumers surveyed, the types of edibles that garnered the most interest were baked goods, chocolate, candies, and beverages. Notably, the US market for marijuana-infused beverages is expected to hit $600 million by 2022, a trend already drawing the attention of large, mainstream beverage companies, perhaps in an effort to bolster the lagging beer and soda industries.

Such US developments act as healthy indicators of a paralleled explosion in the Canadian food and beverage market, which has already taken root if recent transactions are any gauge of interest. The following deals highlight some of the forms that such investment opportunities can, and have, taken for a handful of industry players:

  • Molson and HEXO: In August of 2018, Molson Coors Canada, the Canadian arm of a multinational brewer, and HEXO Corp., a Canadian cannabis producer, formed a joint venture, "Truss", to pursue the development of non-alcoholic cannabis-infused beverages in the Canadian market. Truss operates as a standalone company, with its own board of directors and management team. The board of directors will consist of five members, of which three are Molson appointees and two are HEXO appointees. Molson holds a controlling interest in the company.
  • Constellation and Canopy: In November of 2018, Constellation Brands, Inc., a leading international producer and marketer of beer, wine, and spirits, invested USD$4 billion in Canopy Growth Corporation, a Canadian cannabis company, to pursue cannabis market opportunities on a global scale. Constellation acquired a 37% ownership interest in Canopy, thus enabling it to veto "fundamental changes" (e.g. sale, lease or exchange of all or substantially all of the corporation's assets, merger, amalgamation) that require the approval of two-thirds of Canopy's shareholders under its governing legislation. In connection with the investment, Constellation also obtained an opportunity to acquire more than 50% control of Canopy, by virtue of the exercise of its warrants, as well as certain governance rights such as pre-emptive rights, demand and "piggyback" registration rights and the right to nominate four of the seven directors on Canopy's board.
  • AB InBev and Tilray: In December of 2018, AB InBev, the parent company of Labatt Breweries and a worldwide brewer, announced a partnership with Tilray, Inc., a global cannabis producer and distributor. AB InBev and Tilray each invested USD$50 million and, together, will research potential non-alcoholic THC and CBD beverages to market in Canada.

Though beverage companies seem to be taking the lead in terms of stepping into the cannabis market, it is worth noting that Deloitte's surveyed participants showed markedly higher interest in food products as opposed to beverages (i.e., 51% for baked goods, 43% for chocolate, 37% for candies, and 31% for beverages). Thus, food companies stand to generate perhaps even greater revenues from strategic partnerships.

As demonstrated by our review of the current landscape above, there is no "model" deal for players in the food and beverage industry seeking to expand into the cannabis sphere. Whether a "model" deal emerges in 2019 remains to be seen, as food and beverage companies continue to pursue opportunities in the cannabis space to take advantage of Health Canada's Cannabis 2.0 regulations and the expected consumer demand for edible products.

The author would like to thank Sarah Pennington, articling student, for her assistance in preparing this legal update.

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