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Two of the largest cannabis companies based in Canada, Aphria and
Tilray,
it plans to merge into a major agreement indicating that the sector has begun to consolidate.
The shares of both companies met in the news, released in early Wednesday. Shares in the United States of Aphria (APHA) gained 5.1% to $ 8.54 and shares of Tilray (TLRY) advanced nearly 30% to $ 10.
Canada moved in 2018 to legalize recreational marijuana, causing a bubble in stock that soon collapsed. Cannabis growers failed quarter after quarter to deliver results that met the expectations they had set themselves.
At one time, there were up to 500 licensed cannabis companies in Canada. Investors and analysts say it made consolidation into a handful of large powerful companies almost inevitable.
“For me it’s really about the standardization of the industry and where it’s headed,” said Jason Wilson, an expert in cannabis research and banking at ETFMG De Barron By phone. “I don’t know if we will certainly see a wave of merger and acquisition activities, but I think in the long run this will be the way forward, where you will see more consolidation in this space as the cannabis industry continues to expand world “.
Rahul Sarugaser, cannabis analyst Raymond James, wrote in a note after the announcement that the merger indicates that consolidation activity has begun. This will endanger smaller companies, creating a more difficult environment for them, he said. Larger companies such as Village Farms (VFF) and
Organization chart background
(OGI), however, may now be potential targets for the merger and acquisition activity, Sarugaser wrote.
Aphria and Tilray executives said the merger means the combined company will have a market share close to 20%, with dozens of brands. The product portfolio will be broader as Tilray’s food and beverage products are added to the Aphria range.
“I think with this combination, the combined company is clearly a winner in Canada and probably a winner in Europe,” said Brendan Kennedy, CEO of Tilray. De Barron in a video interview. Kennedy said the combined business will have a positive cash flow return, growth potential and global reach.
A possible move to the US market is part of the field. Simon said Aphria already has a $ 120 million hemp and alcohol business, in part because of its acquisition of southern craft beer company SweetWater.
“When legalization occurs, or if it occurs, it is either exported from Canada, or we are building our own facilities and we can sell in the United States and already participate in it, or if we potentially buy one of these [U.S. cannabis companies], we will be prepared for that, “Simon said De Barron.
Despite these advantages, the Aphria-Tilray fusion also seems to be the product of necessity. Tilray has struggled for years to get high-quality cannabis from outside suppliers (including a $ 30 million prepaid deal that collapsed and sparked legal proceedings) and may be questioning his business model, which was based on having few cultivation resources.
The company remains unprofitable and sales appear to have flattened. The major transactions it previously announced have not yet had the desired effect, such as the acquisition of Manitoba Harvest hemp food company and a marketing agreement with Authentic Brands Group that resulted in a $ 112 million impairment charge. of dollars earlier this year.
Investors have punished Tilray’s shares. After trading in 2018 at $ 17, the shares reached $ 300 shortly after its initial public offering. For most of this year, it has traded below its IPO, with a loss of approximately 43% during the year. Aphria’s shares have gone in the other direction, rising more than 60%.
The nuts in the Aphria-Tilray deal are as follows: Once the transaction is closed, likely in the second quarter of next year, the combined company will be worth about $ 4 billion. It will keep Tilray’s U.S. listing on the Nasdaq under its current ticker.
The combined company’s revenue over the past twelve months would have been $ 685 million. When asked if the revenue figure takes into account the cannibalization of overlapping products and whether adding the two revenue figures provided a reliable estimate, Simon said, “One plus one equals five, at least.” .
Simon will lead the new company, while Tilray will get two seats on the nine-person board, and Tilray’s current CEO, Brendan Kennedy, will take one. According to the companies, the merger will cost about $ 78 million.
Corrections and amplifications: Brendan Kennedy is the CEO of Tilray. An earlier version of this article misspelled his name.
Write to Max A. Cherney to [email protected]