Two of the largest cannabis companies in Canada, Aphria and
plan to merge in a major deal signaling that the industry is beginning to consolidate.
The shares of both companies recovered after the news, which was announced early Wednesday. Aphria’s (ticker: APHA) US listed shares rose 5.1% to $ 8.54, and Tilray (TLRY) shares were up nearly 30% to $ 10.
Canada moved in 2018 to legalize recreational marijuana, creating a bubble in pot supplies that quickly collapsed. Quarter after quarter, cannabis producers failed to deliver results that met their own expectations.
At any one time, there were as many as about 500 licensed cannabis companies in Canada. Investors and analysts say consolidation was almost inevitable in a handful of large, powerful companies.
“For me, it really speaks to the standardization of the industry and where it’s headed,” said Jason Wilson, a cannabis banking and research expert at ETFMG. Barron’s over the phone. “I’m not sure we’ll see a flurry of mergers and acquisitions for sure, but I think this will be the way forward in the longer term, where you’ll see more consolidation in this space as the cannabis industry continues to expand globally.”
Raymond James cannabis analyst Rahul Sarugaser wrote in a note following the announcement that the merger is a signal that consolidation activity has begun. That puts smaller businesses at risk and creates a more challenging environment for them, he said. Larger companies such as Village Farms (VFF) and
Organizational Chart Holdings
(OGI), however, may now be potential targets for merger and acquisition activity, Sarugaser wrote.
Aphria and Tilray executives said the merger means the combined company will have nearly 20% market share, with dozens of brands. The product portfolio expands as Tilray’s edible and beverage products are added to the Aphria range.
“I think with this combination, the combined company is clearly a winner in Canada and probably a winner in Europe,” Tilray CEO Brendan Kennedy said. Barron’s in a video interview. Kennedy said the combined company will have positive cash flow profitability, growth potential and global reach.
A possible move to the American market is part of the field. Simon said Aphria already owns a $ 120 million US business in hemp and alcohol, in part because of its acquisition of Southern craft brewery company SweetWater.
“When legalization happens, or when it happens, whether it’s exporting from Canada, whether we’re building our own facilities and selling in the US and already participating, or whether we might buy one of these [U.S. cannabis companies]”We’re ready,” said Simon Barron’s.
Despite those benefits, the Aphria-Tilray merger also appears to be the product of necessity. Tilray has struggled for years to get high-quality cannabis from third-party suppliers – including a $ 30 million prepaid deal that failed and led to litigation – and may be questioning his business model, which was based on low cultivation resources .
The company remains unprofitable and sales appear to have leveled off. Major deals it previously announced have not yet had the desired effect, such as the acquisition of hemp food company Manitoba Harvest and a marketing agreement with Authentic Brands Group that triggered an impairment charge of $ 112 million earlier this year.
Investors have punished Tilray’s stock. After listing at $ 17 in 2018, the stock reached $ 300 shortly after the initial public offering. For most of this year, it traded below its IPO price, with a loss of about 43% for the year. Aphria’s shares have gone the other way and are up more than 60%.
The nuts and bolts of the Aphria-Tilray deal are as follows: Once the transaction is completed, likely in the second quarter of next year, the combined company will be worth approximately $ 4 billion. It keeps Tilray’s US listing on the Nasdaq below the current ticker.
The combined company’s sales in the past 12 months would have totaled $ 685 million. When asked whether the sales figure takes into account cannibalization from overlapping products and whether adding the two sales figures gives a reliable estimate, Simon said, “One plus one equals five, minimum.”
Simon will lead the new company, with Tilray taking two seats on the nine-member board, while current Tilray CEO Brendan Kennedy will take one. According to the companies, the merger will generate approximately $ 78 million in cost savings.
Corrections and Reinforcements: Brendan Kennedy is Tilray’s CEO. An earlier version of this article misspelled his name.
Write to Max A. Cherney at [email protected]