Aphria and Tilray Merger to Create $3.9 Billion Global Cannabis Giant

Canadian cannabis companies Aphria and Tilray announced on Wednesday (16) plans to merge: a transaction that would create a giant international cannabis company with a combined equity value of approximately CAD 5 billion, equivalent to USD 3.9 billion.

The resulting company from the merger would be the 'largest global cannabis company in the world' based on revenue of CAD 874 million over the last 12 months, according to a joint statement. With the merger, the combined company would operate under the name Tilray, with offices in the United States, Canada, Portugal, and Germany.

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In addition to competing in Canada's adult-use cannabis market, Aphria and Tilray stated that the new company would be 'well positioned' to seek growth opportunities in Europe, based on Aphria's German assets and Tilray's production facilities in Portugal.

The companies also highlighted their packaged consumer goods infrastructure in the U.S., including Aphria's recently acquired craft brewery SweetWater Brewing Co. and Tilray's hemp food business Manitoba Harvest.

'The combined company is expected to have a strong and flexible balance sheet, cash reserves, and access to capital, giving it the ability to accelerate growth and deliver attractive returns to shareholders,' said Tilray and Aphria in the statement.

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According to the agreement, structured as a reverse acquisition of Tilray, each Aphria shareholder would receive 0.8381 shares of Tilray for each Aphria share held, meaning Aphria shareholders would hold about 62% of the outstanding Tilray shares. This represents a 23% premium over Tilray's stock price at market close on Tuesday.

The combined company would be led by Aphria's CEO, Irwin Simon, and a nine-member board of directors - seven directors from Aphria, including Simon, and two from Tilray, including Tilray's CEO, Brendan Kennedy.

The cost-reduction synergies from the combination would total approximately CAD 100 million over 24 months, the companies said.

During a conference call and investor presentation on Wednesday morning, executives from Aphria and Tilray said the merger is expected to be completed in the second quarter of 2021, subject to shareholder, regulatory, and court approvals. Simon stated that he aims to capture at least 30% of the Canadian market.

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He also articulated an optimistic outlook for the combined company's European operations, saying he sees 'a good chance' for the legalization of adult-use in Germany and Portugal in 2021. Germany rejected an adult-use cannabis legalization bill in October.

As for the company's plans in the U.S., Simon noted that the combined company would still not be able to operate at full capacity.

'But when legalization (in the U.S.) happens, when we have the best in class in Canada, the best in class in Europe ... and having a business in the U.S. market, being domiciled in the U.S. market - the opportunity to buy something, create something, will be within our reach to move forward and do,' Simon said.

Simon also stated that the resulting company from the merger plans to look for new acquisition opportunities.

Kennedy expressed belief that it is 'extremely likely' that all European Union countries will legalize medical cannabis in the next two years, particularly in light of a recent United Nations vote to reschedule marijuana.

'There are enormous growth opportunities, not only in the existing European market but in new markets, such as the medical market in France,' he said. 'I think this will lead to more conversations about adult-use legalization in Europe, occurring not only in 2021 but in the following years.'

However, Marijuana Business Daily has extensively reported that business opportunities in emerging medical cannabis markets, including Europe, have been severely limited by strict regulations, meaning that countries legalizing medical cannabis do not necessarily open doors to significant revenue.

The regulated medical cannabis industry in Europe saw €240 million in sales in 2019, according to the MJBizDaily report, 'Medical Cannabis in Europe: The Markets & Opportunities.'

Analyst Reaction

Pablo Zuanic, an equity analyst at Cantor Fitzgerald, based in New York, estimated that the combined company would have nearly 19% market share in Canada's adult-use cannabis market, based on data from the point-of-sale platform Hyfire.

'The merger makes sense because the Canadian cannabis sector is ripe for consolidation, given the issues of oversupply, historically low retail flower prices, and asset and cost bases that are misaligned with the current state of development in Canada and abroad,' Zuanic wrote in a research note on Wednesday morning. 'We believe that other mergers may occur in Canadian territory.'

'We believe this deal will further cement the combined entity as the number one player in the Canadian sector,' wrote equity analyst Matt Bottomley from Canaccord Genuity, based in British Columbia, in a research note on Wednesday.

In terms of U.S. plans, Bottomley wrote that he expects the combined company to 'gain a significant presence while seeking opportunities to gain exposure to cannabis south of the border, if regulations allow.'

The equity research team at Cowen, based in New York, noted on Wednesday that the cost synergies resulting from the merger 'adds to Aphria's track record as the only Canadian (licensed producer) to consistently produce significant quarterly EBITDA.'

Source: Solomon Israel/Marijuana Business Daily