Bloomberg reported on Friday that the second-largest brewer in North America, Molson Coors, has for months been looking to buy into the recreational marijuana market. Molson is rumoured to be in talks with at least four different legal producers: Aphria (TSE: APH), Aurora Cannabis (TSE: ACB), and two other unnamed companies.

Grizzle thinks Molson will eventually buy a minority equity stake in Aphria for the following reasons:

Aphria has the size to supply Molson’s giant user base. Aphria is building a sophisticated processing facility that can provide the cannabis oils needed for infused beverages. Aphria chose not to dilute shareholders to the same extent as competitor Aurora Cannabis and peers, providing Molson with a cheaper and more efficient way to gain exposure to the marijuana industry.

Why Molson Coors Wants Into Marijuana

Buying into the marijuana industry provides diversification for Molson to protect their bottom line should marijuana really start hurting beer sales.

If you’re a large beer company, times are tough. The explosion in the popularity of craft beer means that the little guys popping up all over North America are stealing much of the growth in beer consumption.

Large players are buying up these craft breweries to try and invigorate their own sales, but even with all of the deal activity, overall volumes continue to stagnate.

Molson can’t afford to ignore an entirely new market segment with explosive growth potential, which explains their decision to dip their tow in through conversations with the largest marijuana industry players.

Just as importantly, data and surveys have been released showing that beer consumption has fallen in states like Colorado, Oregon, and Washington after legalization of recreational marijuana.

Buying into the marijuana industry provides diversification for Molson to protect their bottom line should marijuana really start hurting beer sales.

1. Molson Coors is Big and Needs a Partner Who Can Handle its Size

The legal marijuana market is still in its infancy and there aren’t many players with the potential capacity and expertise to supply Molson’s huge customer base.

Aphria will be producing over 250,000 kg at full capacity and will be the first grower in the industry to bring on a greenhouse over 500,000 sq ft.

2. Infused Beverages Need Cannabis Oils

Aphria just announced a major project to build a world-class marijuana processing space that will allow them to turn dry flower into oils that can be used for edibles, pharmaceuticals, and especially for infused beverages.

One type of extraction machine, which Aphria will likely own, produces marijuana oil nano-emulsions (extracts that are water soluble and can be mixed into any type of beverage).

Molson needs a company at the cutting edge of marijuana processing technology and Aphria checks that box.

3. Less Shares Mean More for the Money

Aphria chose a different strategy than competitor Aurora Cannabis, and investors are much better off as a result.

Aphria is growing organically instead of overpaying for acquisitions like Aurora and hasn’t diluted shareholders to the same extent who now benefit from a much lower share count.

Why this matters is because each share of ownership in Aphria theoretically entitles an investor to 1 gram of future capacity. An investor in Aurora on the other hand only owns half a gram of capacity or 50% less.

If Molson cares about value, they will see that a dollar invested in Aphria buys them twice the share of capacity so they can produce infused beverages for less.

Owning a Share Entitles You to a Portion of Production

Aphria is the Only Choice

Molson has no desire to get into the growing business, which narrows down the list of potential investments to growers with sophisticated processing assets — basically the top 6 players.

Based on size, sophistication and value for the money, we think Aphria is Molson Coors’ number one choice to help it navigate through the emerging marijuana beverage market.

For Aphria, an investment from a sophisticated player like Molson Coors would validate its business model and could catapult Aphria into the big leagues with Canopy Growth as an industry bellwether, opening the stock up to a whole new group of investors.

The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Grizzle hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.