A Standard Press Release on The Surface

CannTrust Holdings Inc. (TSE: TRST) announced on September 10 that Breakthru Beverage Group will be the company’s exclusive distributor of cannabis throughout Canada.

Breakthru is a nationally established Canadian alcohol broker and will provide CannTrust with a much-needed distribution and sales channel to make sure their products are front and centre in retail stores when the legal market opens October 17.

Why This Deal is Important

Locking up a distribution channel is a very important piece of the puzzle for CannTrust to effectively compete in the legal cannabis market.

Licensed growers have two strategies to bring their supply to market.

  • Apply for retail licenses and sell product directly through their own stores in provinces that allow it.
  • Work with a distributor who has the sales force necessary to convince the government and private retail stores to stock the shelves with a CannTrust product instead of a competitor’s offering.

CannTrust, along with Aphria (TSE: APH), are focusing on a wholesale distribution model, which may turn out to be the smart choice due to lower capital requirements and more simplicity than opening and operating retail stores in additional to getting cultivation right.

 

The Devil is in the Details

As we dug deeper into Breakthru Beverage Group, a paragraph on Breakthru’s website caught our eye.

With operations in Canada starting in 2014, Breakthru Beverage, formerly known as Wirtz Beverage, expanded to an international footprint becoming the exclusive broker for Diageo spirits and beer brands throughout the country.

This means that CannTrust and Diageo now share the same exclusive distributor.

Now this could be just a coincidence, but more often than not a small partnership leads to a bigger one.

Either CannTrust deliberately signed with Breakthru as a way to cozy up to Diageo, or this distribution deal could signal the seeds have been planted for future collaboration between Diageo and CannTrust.

It would be seamless for Diageo to plug CannTrust’s deep slate of products into a shared distribution and sales platform.

 

CannTrust Ticks all the Boxes for Beverage

As we said in prior reports, beverage companies value the product pipeline, branding, and customer insight of licensed producers, in that order.

CannTrust is a strong contender in all areas, but has unique expertise in the most important area, the product pipeline.

Infused beverages require water soluble cannabis oil and CannTrust is the market leader in this area.

The company generated 60% of revenue from cannabis oil sales in the last quarter, an industry high, and is one of the first Canadian companies to receive infused beverage patents for their brewBudz line of coffee pods.

Not to mention they have a patent pending nanotechnology created specifically for dissolving cannabis oil into all types of beverages.

CannTrust’s deep infused beverage pipeline with formulations already created for multiple beverage categories, presents a very attractive attribute for an acquirer like Diageo.

Infused Beverages – CannTrust Investor Deck

CannTrust Investor Deck

Not to Mention CannTrust’s Reasonable Price

Diageo would only have to cough up CAD$1.6 billion to buy CannTrust compared to CAD$6 billion Constellation paid for less than 40% of Canopy Growth.

Another important factor making us think CannTrust is a leading target for Diageo is the stock market valuation.

Looking at the estimated Enterprise Value* multiple in 2020 for the top 10 licensed growers, CannTrust trades at a 45% discount to the group average.

*Enterprise Value is the value of all shares outstanding plus debt outstanding minus cash on hand.

EV/EBITDA in 2020

Grizzle Estimates

Diageo would only have to cough up CAD$1.6 billion to buy CannTrust outright at a 30% premium, a steal compared to the more than CAD$6 billion Constellation brands has already spent for less than 40% of Canopy Growth.

 

Adding it all Up, CannTrust Could be the One

Though we’re only speculating at this point, the fact that Diageo and CannTrust now share the same distributor in Canada seems like more than a coincidence.

CannTrust just makes sense as a beverage play, possessing the deepest product pipeline and the most experience processing and selling high quality cannabis oil, the main ingredient in an infused beverage.

Merger chatter is rampant in the market and many cannabis companies trade at a premium as a result.

Luckily for Diageo, CannTrust is not one of them.