Time Will Ultimately Tell If The Aphria And Tilray Mega-Merger Will Boom Or Bust

Yesterday, Aphria Inc. (TSX: APHA) (Nasdaq: APHA), and Tilray, Inc. (Nasdaq: TLRY) sent shockwaves through the cannabis industry after the companies announced a definitive merger agreement and this is a transaction that caught our attention. 

A few months ago, rumors about a potential merger between Aphria and Aurora Cannabis Inc. (ACB.TO) (ACB) surfaced. From a synergy and a growth standpoint, we consider Tilray to be a better fit for Aphria and are bullish on the growth prospects that are associated with the combined company.  

The implied pro forma equity value of the combined company is approximately C$5.0 billion (based on the share price of Aphria and Tilray at the close of the market on December 15th). Following the completion of the transaction, Tilray will be the surviving asset and the combined company will trade under the symbol, TLRY.

From a domestic and an international growth standpoint, the combined company will have a complete portfolio of branded cannabis 2.0 products in Canada and is well-positioned to record growth on the international side of the business. Between Aphria’s medical cannabis and distribution footprint in Germany, and Tilray’s European Union Good Manufacturing Practices (EU-GMP) low-cost cannabis production facility in Portugal, the combined company is positioned to capture significant market share in the EU. 

One of the reasons we are bullish on the transaction is related to the leverage that it will have to the US cannabis market. A few months ago, Aphria acquired SweetWater Brewing Company, a cannabis lifestyle branded craft brewer. In the US, the combined company has enhanced its consumer packaged goods presence and we are favorable to the infrastructure that is included in the transaction. 

From a liquidity standpoint, the combined company is expected to have a strong, flexible balance sheet, cash balance and access to capital. The improvement in the balance sheet should make it easier for the combined company to accelerate growth and create value for shareholders. 

Some of the reasons we are favorable on the transaction include:

  1. Improves financial strength and flexibility
  2. Creates the largest Canadian recreational cannabis company (based on revenue for the last twelve months)
  3. Increases and enhances the amount and the type of products that are available 
  4. Creates a leading EU operator that is well-positioned to execute on growth opportunities with its end-to-end EU-GMP supply chain and distribution
  5. In the US, the company plans to capitalize on cannabis beverage trends via SweetWater and plans to expand with new or existing CBD or other cannabinoid brands via Manitoba Harvest
  6. Positioned to leverage the companies’ distribution networks in Canada to sell SweetWater’s 420 cannabis lifestyle brand in Canada
  7. Expects to find approximately C$100 million of annual pre-tax cost synergies within 24 months of the completion of the transaction

The market initially responded favorably to the merger agreement and we will monitor the trend from here. Going forward, we expect to receive additional guidance on the potential of the combined company and this is a transaction that we are bullish on. 

If you are interested in learning more about the agreement between Aphria and Tilray, please send an email to support@technical420.com with the subject “Aphria and Tilray” to be added to our distribution list.

After the acquisition was announced, we sold our entire position in Aphria and do not own any stock in either company. Going forward, we do not plan to purchase Aphria or Tilray over the next 90 days. If we were to purchase stock after this period, we will de-list Tilray to avoid having any conflicts of interest.

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Authored By

Michael Berger

Michael Berger is Managing Partner of StoneBridge Partners LLC. SBP continues to drive market awareness for leading firms in the cannabis industry throughout the U.S. and abroad.

Published at Thu, 17 Dec 2020 12:45:11 +0000

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