Tilray wins, even though Aphria is in charge

Canadian cannabis companies Aphria (APHA) and Tilray (TLRY) have announced that the two companies will merge, making it the largest cannabis company in terms of sales. The combined company’s sales over 12 months would be C $ 874 million, which is more than other market leaders such as Canopy Growth Corp. (CGC) and Curaleaf Holdings Inc. (CURLF).

While many think that Tilray will be on top because the merged company will use the Tilray name, Aphria will own more of the company – meaning it’s in charge here. Aphria will own approximately 62% of the combined company, with Aphria shareholders receiving 0.8381 shares of Tilray for each Aphria share they own. In addition, Aphria’s current Chairman and CEO, Irwin D. Simon, will lead the new company as Chairman and CEO.

One of the main reasons Aphria is at the forefront of this marriage is income. In November, Tilray reported that total revenue for the third quarter was stable at $ 51.4 million and only 2.0% consecutively higher. The company attributed the disappointing results to the discontinuation of bulk sales and a slight drop in medical sales in Canada, which saw revenues from the cannabis segment drop 11% to $ 31.4 million. The total number of kilogram equivalents of cannabis sold decreased by 53% to 5,107 kilograms, from 10,848 kilograms in the third quarter of last year.

Aphria, on the other hand, has had much better results, as the company reported in October that its gross sales were $ 69.6 million in the first quarter of fiscal year 2021. This represented strong growth, up 23% from the previous quarter, as well as the sixth consecutive quarter of growth. The company’s net cannabis revenues were $ 62.5 million, a massive 103% increase from the same quarter last year. The company reported adjusted EBITDA of $ 10.4 million for the cannabis business, an 11% increase from the previous quarter.

Tim Seymour, Portfolio Manager of Amplify Seymour Cannabis ETF said: “Aphria is currently the most profitable Canadian operator and the EBITDA positive business trend and balance sheet are fundamental to our overweight share in our CNBS ETF. In addition, we have confidence in Irwin Simon to deliver the further position the company in a distinct CPG category he has previously navigated. ”Seymour went on to say,“ Tilray was the poster child for the euphoria in Cannabis 1.0. With a market cap of> $ 20 billion at its peak, the valuation could be never make sense with Canada as the core market. “

Tilray now has a market cap of $ 1.24 billion, which is still very respectable, but as Seymour noted, disappointed investors brought the stock price back to reality.

“The concept of strategic partners in Cannabis was an important driver for valuations, but in many cases there was not much,” he said. “The main focus for the industry over the past 18 months has been profitability and growth – and both are heavily supplied, especially in the US.”

USA vs Canada

While Canada was the first to legalize as a country, the US market dominates cannabis sales. Cannabis companies operating only in Canada were at a disadvantage, which is why so many are scaling back and closing their Canadian operations. However, Aphria and Tilray cross their fingers that President-elect Biden will ease the path to legalization and create opportunities for Canadian companies. Jason Wilson of MJ and the ETFMG Cannabis Banking and Research expert said, “The merger is timely as it strengthens the combined company’s ability to take advantage of potential US federal legalization.”

Aphria said in November it would enter the US through an agreement to acquire craft brewer Sweetwater Brewing Co. for about $ 300 million. SweetWater is known for beers that use terpenes and hemp flavors. Aphria said the brand is “closely aligned with the cannabis lifestyle”. Tilray owns Manitoba Harvest, a hemp company that sells products in the US and Canada. So, both companies are trying to enter the US market in a way that doesn’t get them in trouble with Canadian securities regulators.

In addition to increasing sales, Aphria also brings international business and beverages to the table. Wilson added, “Aphria’s German assets will enable the combined company to increase its global presence as an increasing number of European countries legalize cannabis for medicinal use, and industry players are looking to take the next step. “

Great for Tilray

Ultimately, this deal is great for Tilray and less so for Aphria. Stifel analyst Andrew Carter has upgraded Tilray’s shares to Hold with the expectation that the deal suggests much improved outlook for Tilray shareholders. “Conversely, we are downgrading Aphria’s stock to Hold, with the recent outperformance pushing the stock to a level that we believe fully considers the company’s points of differentiation from peers, with tradeoffs and scrutiny before entering into this merger, given the category, “Carter said. He also set a target price of C $ 9.80 based on Aphria’s 62% stake in the combined entity. He added that the performance in the Canadian market in the unlikely to generate enthusiasm for evaluating Aphria’s differentiated growth profile versus peers in the short term.