Cannabis deals in Europe will help pot giant Aphria build a war chest ahead of an expected frenzy of mergers and acquisitions in the US, the company’s chairman and CEO told MarketWatch ahead of the group’s earnings on Monday.
High margin medical cannabis deals in Europe represent crucial waypoints on Aphria’s APHA,
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way to conquer the US, strengthen the company’s balance sheet and get it firmly on its feet with European regulators, said Irwin Simon.
As in the US, legal recreational cannabis remains on the horizon in Europe, where a combined population of over 500 million in the UK and the European Union makes it a lucrative proposition.
Aphria is ready to complete its merger with Tilray TLRY,
this quarter, creating the world’s largest cannabis company by revenue. The combined company will continue to the UK, Sweden, Poland, Luxembourg and China, with deal talks in India, Aphria said.
The expansion in Europe will take place in a few weeks at the earliest, when Tilray will start distributing in Luxembourg, and Aphria and Tilray companies will enter Poland by the third quarter of this year.
In China, the group will have a distribution agreement for wellness products containing CBD – a non-psychoactive chemical in cannabis used, among other things, to treat pain and anxiety. A similar agreement is under development in India.
Aphria is a major player in global cannabis with a market cap of $ 5.1 billion. The group is preferred by analysts for being the first Canadian cannabis company to report net profit. In December, Aphria agreed to combine with smaller rival Tilray, which has a market cap of $ 3.5 billion, through a reverse takeover.
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In exchange for sharing its relatively strong balance sheet with Tilray, Aphria would inherit the company’s presence in 10 European countries, including the UK, Germany, France, Spain and Portugal, where it has a growing facility. In addition to Aphria’s growing site in Germany and European drug distribution, the combined group is said to be the most dominant cannabis player in the region.
Because recreational marijuana remains illegal in Europe and Asia, cannabis companies can sell their products on the regulated medical market at much higher prices than on legal recreational markets in the US and Canada. This increases margins as the emerging industry faces profit barriers, including price pressure from competing companies and a well-entrenched black market.
Countries in Europe have legalized cannabis for medical purposes and the drug has been decriminalized for recreational use in countries such as Italy, Austria, Portugal and the Netherlands. Many, including Simon, see the legalization of recreational weed as a matter of course in much of the region.
“In many ways Europe is more progressive,” said Simon. “There is much to learn to take away from Europe that we will eventually bring to the US once legalization takes place here.”
But for now, the drug remains federally illegal in the US, although individual states, including most recently New York, have legalized it. Prohibition at the national level has largely kept institutional money out of the sector and is a roadblock to interstate business and trade in pots that cross the US-Canada border. It has also increased stock market volatility with a high percentage of stocks held by retail investors.
Optimism about federal legalization has grown with the Biden administration, but remains hypothetical. National decriminalization would be crucial to getting a US pot bonanza off to a serious start, but analysts see the Senate’s approval of the SAFE Banking Act as a smaller stepping stone. The law would allow the cannabis industry to partner with US financial services and insurance groups.
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While some of Aphria’s competitors have dug their toes into US mergers and acquisitions through acquisitions that depend on changes to US law, Simon wants to keep Aphria on the sidelines for now.
Kristoffer Inton, an analyst at Morningstar, told MarketWatch that US assets with positive exposure to legalization are attractive to private equity, alcohol and tobacco, and Canadian cannabis groups. These assets are generally expensive, Inton said, and groups like Aphria should be careful not to overpay in the current optimistic environment or the mergers and acquisitions expected to accompany legalization. “How are you going to translate optimism into actual exposure without overpaying for assets if everyone wants?” Inton said.
The most ambitious piece that Aphria made in the US was its acquisition of craft brewer SweetWater last December, giving the company a reliable additional sales channel of alcohol and exposure to cannabis-infused beverages. Consumable derivatives of the drug are widely regarded as the future of the industry, and Tilray has a partnership with beverage giant AB InBev BUD,
Ultimately, analysts point to high valuations in the cannabis sector, as rooted in market prices in some level of US legalization. Despite all the talk of expanding into Europe, Simon recognizes that America is crucial to the stock’s future.
His plan to attack the US market is largely based on building on successes in Canada and Europe. Simon’s ambitions are to grow the combined market share of Aphria and Tilray in Canada from approximately 20% to 30% while keeping cash flow positive. He also wants to remain the largest medical cannabis company in Europe, including by finding a strong strategic partner in the region and leveraging relationships with regulators to obtain licenses in markets that legalize recreational weed.
If Simon is successful, the company will build a healthy war chest for the coming battle in the US. The SweetWater business is off to a good start, Simon said, and Tilray’s assets include hemp food producer Manitoba Harvest, which operates in the US. maybe not enough, and Simon knows it can be an expensive fight.
‘I’ll try to get it right [multistate operator] once I know what will legalize the market or how the market will legalize in the US, ”said Irwin. “I would rather pay a little more if I can start a business where the facts are known.”
Aphria shareholders will receive 0.8381 Tilray shares for each Aphria share they own when the companies merge, pending shareholder approval in the coming days. The group would operate under the name of Tilray and its shares are traded through Tilray’s listing on the Nasdaq. Simon becomes chairman and CEO of the combined company, of which Aphria shareholders would own 62%.
Aphria stock is up over 130% so far, while stocks in Tilray are up over 140% since the start of the year.