Tilray Wins, Even Though Aphria Is the Boss

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Canadian cannabis companies Aphria (APHA) and Tilray (TLRY) have announced that the two companies would be merging, making this the largest cannabis company by sales. The combined company’s 12-month sales would be C$874 million, which is greater than other industry leaders such as Canopy Growth Corp. (CGC) and Curaleaf Holdings Inc. (CURLF) .

While many may think Tilray is coming out on top because the merged company will use the Tilray name, Aphria will own more of the company — meaning it is the boss, here. Aphria will own about 62% of the combined company, with Aphria shareholders getting 0.8381 shares of Tilray for each Aphria stock they own. Plus, Aphria’s current Chairman and Chief Executive Officer, Irwin D. Simon, will lead the new company as Chairman and CEO.

One of the main reasons why Aphria is taking the lead in this marriage is revenue. In November, Tilray reported that its total revenue for the third quarter was flat at $51.4 million and up only 2.0% sequentially. The company attributed the disappointing results to the discontinuation of bulk sales and a slight decrease in Canada medical sales, which caused cannabis segment revenue to fall by 11% to $31.4 million. Total cannabis kilogram equivalents sold decreased 53% to 5,107 kilograms from 10,848 kilograms in the prior year’s third quarter.

Aphria, on the other hand, has been delivering much better results as the company reported in October that its gross revenue was $69.6 million in the first quarter for the fiscal year 2021. This represented strong growth, showing a 23% increase from the prior quarter, as well as the sixth consecutive quarter of growth. The company’s net cannabis revenue totaled $62.5 million, showing a whopping increase of 103% from the same quarter last year. The company reported an adjusted EBITDA of $10.4 million for the cannabis business, representing an 11% increase from the prior quarter.

Tim Seymour, Portfolio Manager of Amplify Seymour Cannabis ETF said, “Aphria currently is the most profitable Canadian operator and the EBITDA-positive operating trend and balance sheet are fundamental to our overweight the stock in our CNBS ETF. In addition, we have confidence in Irwin Simon to position the company further into what is a clear CPG category that he has navigated before.” 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 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 pointed out, disappointed investors brought the share price back down to reality.

“The concept of strategic partners in Cannabis was a major driver for valuations, but in many of the cases there was not much there,” he said. “The more important focus for the industry in the last 18 months has been profitability and growth — and both are in heavy supply, especially in the USA.”

U.S. vs. Canada

While Canada was first to legalize as a country, the U.S. market dominates cannabis sales. Canadian-only cannabis companies found themselves at a disadvantage, which is why so many are scaling back and closing Canadian operations. Aphria and Tilray, though, are crossing their fingers that President-elect Biden will ease the path towards 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 U.S. federal legalization.”

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

In addition to bringing strength in revenue, Aphria brings international business and beverage business to the table. Wilson added, “Aphria’s German assets will allow the combined company to increase its global presence as an increasing number of European countries legalize cannabis for medical use, industry players have been looking to jump into the next.”

Great For Tilray

Ultimately this deal is great for Tilray and less so for Aphria. Stifel analyst Andrew Carter upgraded the shares of Tilray to Hold with the outlook that the deal suggested greatly enhanced prospects for Tilray shareholders. “Conversely, we are downgrading the shares of Aphria to Hold, with the recent outperformance pushing the shares to a level we believe fully considers the company’s points of differentiation relative to peers, with tradeoffs and scrutiny for undertaking this merger given Aphria’s position of strength in the category,” said Carter. He also established a C$9.80 target price based on Aphria’s 62% ownership of the combined entity. He added that near-term performance in the Canadian market is unlikely to drive enthusiasm for evaluating Aphria’s differentiated growth profile relative to consumer peers.

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