Buzz around legalization has gigantic players looking to Canada for a lift. For veteran alternative investors, that’s a sign reading “exit ahead.”
A lot has been said marveling over how mighty Coke is talking to Canadian producers to concoct cannabis-infused products. After all, there’s always a thrill of cognitive dissonance when the establishment shifts.
But while people talk about whether Coke is on the verge of harnessing disruptive power or simply trying to keep its $200 billion franchise relevant, we’ve seen it all before.
This is what happens when an alternative investment class hits the big time. And it raises big questions for high-net-worth investors and those who work with them.
Start with the background. Cannabis is controversial. Even though it’s come a long way from the black market, U.S. companies still survive on the kindness of regulators.
In theory, the federal government can make life impossible for operators on this side of the border at any time. Even state-by-state systems are subject to changing enforcement regimes.
That’s made this a difficult industry for most investors to buy into without jumping a lot of red tape. For years, these companies were legal but the stocks were closely guarded beyond national borders and in obscure holding companies.
Coke and companies like it change the game because they’re already hypernational institutions. They already do business across all regulatory frontiers.
When one of those giants reaches down into a fledgling industry, they distort the landscape fast. That’s what we’re seeing now. Cannabis stocks have gone berserk in Canada, leading the entire market in terms of both volume and price action.
And investors on all sides of the border need to know the role they want to play from here on out.
A $20 billion shadow
Compliance and scale are the main questions here. Coke is playing its early cannabis game conservatively in order to protect the core brand.
It isn’t leaping to bottle psychoactive funny soda that could easily trigger a backlash if it gets into the wrong supermarket, the wrong state, the wrong hands.
Whatever emerges from the company’s talks with Aurora Cannabis will at least initially be positioned as a “wellness” product full of therapeutic essential oils derived from the plant.
In that sense, this is just another flavor for the giant to add to its sprawling repertoire. For them, it’s just another tilt in the endless feeding cycle.
When people wanted a sugary buzz generations ago, they reached for a Coke. When the sugar became a problem, the company diversified into diet formulas, iced teas, vitamin waters, juices.
Adding cannabidiol is really only as strategically daring as updating the type font on the cans, now that the ingredient is nominally classed as “hemp” and legal throughout the U.S. under the right circumstances.
The ingredient may not even be called “Coke.” It won’t matter. Revenue is revenue and the company already supports hundreds of global brands in pursuit of added sales.
But if compliance seems relatively straightforward now, “relative” is still the operative word. There’s some clarity now about selling the oil down here and a bright green light when it comes to farming it in Canada.
For generations, dabbling in this business was still a taboo for any global corporation and a federal crime for the rest of us. Coke isn’t going to go all in until management sees that the space is stable.
That’s where the scale comes in. Coke is big, but it only does $30 billion a year in sales. What it has is an enormous amount of cash it’s been unable to spend.
And people love to tout cannabis as an industry that went from zero to $10 billion, but it’s extremely fragmented. Even $5 million in the right place can be transformational for most of the mom-and-pop operators.
With $20 billion and an ironclad credit rating, Coke can easily buy out a huge slice of the industry without blinking.
It doesn’t want to. Going all in on a fad isn’t the way this company operates its brand portfolio.
But management isn’t likely to wake up for anything less than a $300 million placement somewhere in the industry — barely 1% of cash, pocket change for them even though it’s truly disruptive for these cash-starved mom and pop operators.
The sheer gravity of that 1% has disrupted asset prices across the board. Brewers like Constellation betting actual billions on “green” beer haven’t helped either.
Remember, there’s maybe $10 billion a year flowing through these operations down here in the states where 65% of the population has access to recreational products. While Canada is 100% legal now but the population is 1/10 the size.
Under normal circumstances, that’s maybe $45 billion in equity all in.
The alternative exit
If people are paying more than that for strategic access to the space, you’re buying into a bubble.
There’s no value call there. It simply means that these assets carry a huge premium relative to less sexy options with less ebullient growth profiles.
Coke isn’t growing at all. They’ve got a lot of money. It’s worth it to them to pay whatever it takes to recover a little dynamism.
From some perspectives, it’s an existential necessity for them to position themselves in the newest and freshest trends.
Investors, on the other hand, can always cash out when they’ve racked up a high enough score. There’s always another allocation.
We haven’t seen valuations in cannabis go truly crazy yet. This is just the opening act of institutional-class buyers setting the stage for their participation in the space.
A lot of early-stage opportunities here will go bust or get bought out. The winners will theoretically be big enough to cover a lot of losers.
That’s how every “alternative” asset class works. It starts small, niche-oriented, by invitation only. Often there are scale constraints that create a little friction as too much money chases too few entries.
Hedge funds started that way, with a few elite managers targeting just enough people who needed a slice of something beyond what the normal markets could give them.
Silicon Valley arguably started that way too. Now these are trillion-dollar enterprises, arguably the status quo that tomorrow’s start-up fights against like the tide.
Even Coke started in a local drugstore. That druggist’s heirs saw their investment turn into a $200 billion behemoth, another chunk of that market status quo.
But the ones looking for a thrill sold early and put their money to work elsewhere.
We won’t see the early “green” investors exit yet. The fun’s just getting started. But the time is coming when even this business calms down.
