What happens when you mix cannabis with coke?

In perhaps the most blatant sign thus far of weed’s acceptance in mainstream culture, Coca-Cola (NYSE:KO) this week said that it’s eyeing the cannabis drinks market.

This development transpired on Monday with reports that the beverage giant was in talks with Canadian cannabis company, Aurora Cannabis (TSE:ACB), to create a health drink infused with CBD (cannabidiol) — a naturally occurring, non-psychoactive compound derived from the cannabis plant.

In a statement issued on Tuesday, Aurora said that it “engages in exploratory discussions with industry participants from time to time.”

Aurora added that "there is no agreement, understanding or arrangement with respect to any partnership with a beverage company."

Coca-Cola didn’t confirm or deny the link with Aurora, which was first reported by Canadian broadcaster, BNN Bloomberg.

Spokesperson, Kent Landers, said: "Along with many others in the beverage industry, we are closely watching the growth of non-psychoactive CBD as an ingredient in functional wellness beverages around the world. The space is evolving quickly. No decisions have been made at this time.”

CBD is believed to have anti-inflammatory, pain-relieving and anti-anxiety properties, and multiple CBD-infused products have recently emerged. CBD products are either derived from industrial hemp plants or marijuana plants.

Estimates vary, but CBD is expected to grow to a US$2.1 billion consumer market by 2020, according to a recent report in the Hemp Business Journal — that’s a 700% increase from 2016. US$450 million of those sales will come from hemp-based sources.

Aurora shares soared on Monday following the report, jumping nearly 17% to close Monday trading at C$9.98, and currently at C$12.25. Coca-Cola’s stock rose 0.72% to US$46.32 on the NYSE.

The past performance of this product is not and should not be taken as an indication of future performance. Caution should be exercised in assessing past performance. This product, like all other financial products, is subject to market forces and unpredictable events that may adversely affect future performance.

Aurora, one of Canada’s largest weed producers with a market cap of C$11.66 billion, has been on something of an acquisition spree, buying at least 10 companies in the past two years. In July, it closed one of the biggest legal pot deals ever, acquiring another medical cannabis company, MedReleaf, for C$3.2 billion.

Last week, Aurora clinched a C$290 million deal to acquire South America-focused ICC Labs (TSX-V:ICC).

Vancouver-based ICC has more than 70% of the market share in Uruguay, which was the first country in the world to legalise recreational cannabis. It also holds Colombian licenses to produce medical marijuana and has an agreement to export cannabidiol products to Mexico.

This week, moreover, Aurora also announced its plans to list its shares on a major US stock exchange by next month. A dual listing for Aurora would follow Canadian pot-stock Tilray's (NASDAQ:TLRY) successful July IPO on the NASDAQ.

Meanwhile, a potential connection to the cannabis sector for Coca-Cola would mark a pivotal moment for the 132 year-old company that owns more than 500 brands around the world.

Coca-Cola’s interest in the pot sector comes on the back of declining sales. The company behind such beverages as Sprite and Diet Coke reported annual revenue of US$35.4 billion in 2017, down 15.5% from the prior year, which has prompted it to search for growth in international markets and new beverage ideas, such as an alcoholic offering that’s only available in Japan. Last month, the company announced that it was buying the UK Costa Coffee chain in a US$5.1 billion deal.

Of course, rather famously, the Coca-Cola drink used to contain cocaine via its coca-leaf extract — although precisely how much is a contentious subject. The beverage has been cocaine-free since 1929.

Coca-Cola also ranks as the fourth most valuable brand in the world, behind Apple, Google, and Microsoft, according to Interbrand. For Coca-Cola to align itself with the legalised cannabis space could make for a considerably rebranded image — one that will probably be slightly different to this:

In a research note, Cowen analyst Vivien Azer cited growing consumer interest in CBD and said its properties lend the ingredient well to a sports recovery drink. Azer said she wouldn’t be surprised to hear of a similar deal by PepsiCo (NASDAQ:PEP) for its Gatorade drink.

Besides Aurora, Azer said that Canadian cannabis companies, Aphria (TSE:APH) and the aforementioned Tilray, were likely targets for partnerships with big consumer companies looking to get into the market.

In an interview with BNN Bloomberg, Martin Landry, managing director of equity research at GMP Securities LP, said that large consumer-packaged goods (CPG) companies such as Coca-Cola or Switzerland-based Nestle S.A. (SWX: NESN) would likely favour a joint-venture (pun perhaps not intended) type of deal with a cannabis producer, rather than making a large equity investment that could be at risk if pot company valuations decline in the coming years.

“What’s happening is that the cannabis industry is still in its infancy and there’s not a lot of partners to dance with,” Landry noted.

Regardless, Coca-Cola’s interest in the nascent cannabis market makes for another clear indication of the rapidly growing acceptance of pot by established, mainstream companies. It also reiterates the importance of Canada to the development of those businesses — and as a major market for a new generation of commercially produced pot-based drinks.

Recreational pot use becomes legal in Canada on October 17, and cannabis companies from the US — where the drug remains illegal at the federal level — have flocked to Canada to raise funds and establish businesses there.

In August, another beverage giant, Constellation Brands (NYSE:STZ) — the maker of Corona beer, Svedka vodka and Casa Noble tequila — bought a multi-billion-dollar minority stake in Ontario-based medical cannabis producer, Canopy Growth (NYSE:CGC | TSX:WEED).

In the same month, Canadian brewer, Molson Coors (NYSE:TAP), inked a deal with Quebec-based cannabis producer, Hydropothecary Corporation (TSX:HEXO), to develop non-alcoholic, cannabis-infused beverages for the Canadian market following legalisation.

UK spirits giant, Diageo (of Guinness beer fame), is also in discussion with at least three Canadian cannabis producers about a possible deal, according to BNN Bloomberg.

However, Coca-Cola seems to be the first major non-alcoholic drinks manufacturer to consider such a move.

According to BDS Analytics, cannabis-infused beverage sales increased to US$35.6 million in 2017 across California, Colorado, Oregon, and Washington, with robust growth reported across the states.

And it’s not all non-psychoactive, either. Lagunita, Heineken NV’s craft beer label, has launched a non-alcoholic drink infused with THC (tetrahydrocannabinol), marijuana's active ingredient — which, unlike CBD, does produce a high.