Cannabis deals in Europe will help powerful giant Aphria build a war box ahead of the expected frenzy of mergers and acquisitions in the U.S., the company’s president and chief executive told MarketWatch ahead of the group’s gains on Monday.
High-margin medical cannabis agreements in Europe represent critical benchmarks for Aphria’s APHA,
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path to US conquest, strengthening the company’s balance sheet and putting it on a firm footing with European regulators, Irwin Simon said.
As in the United States, legal recreational cannabis remains on the horizon in Europe, where a combined population of more than 500 million in the UK and the European Union makes it a lucrative proposition.
Aphria will end its merger with Tilray TLRY,
this quarter, creating the world’s largest revenue-generating cannabis company. The combined company will drive the UK, Sweden, Poland, Luxembourg and China, with discussions on ongoing deals in India, Aphria said.
The expansion into Europe will take place in a few weeks, when Tilray will start distributing in Luxembourg, with companies Aphria and Tilray entering Poland in the third quarter of this year.
In China, the group will have an agreement to distribute wellness products with CBD, a non-psychoactive chemical from cannabis that is used to treat pain and anxiety, among other conditions. A similar agreement is being developed in India.
Aphria is a key player in global cannabis with a market capitalization of $ 5.1 billion. The group is a favorite of analysts to be the first Canadian cannabis company to make a net profit. In December, Aphria agreed to merge with smaller rival Tilray, which has a market capitalization of $ 3.5 billion, through a reverse acquisition.
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In exchange for sharing its comparatively 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 plant. Added to Aphria’s growing location in Germany and the European drug distribution business, the combined group would be the most dominant cannabis player in the region.
As the recreational pot remains illegal throughout Europe and Asia, cannabis companies can sell their products in the regulated medical market at much higher prices than in the legal recreational markets of the U.S. and Canada. This increases margins as the nascent industry faces barriers to profits, including price pressure from competing firms and a well-established black market.
European countries have legalized cannabis for medical purposes and the drug is being decriminalized for recreational use in countries such as Italy, Austria, Portugal and the Netherlands. Many, including Simon, consider the legalization of recreational weeds to be a natural issue in much of the region.
“In many ways, Europe is more progressive,” Simon said. “There’s a lot of learning to get out of Europe that we’re finally bringing to the United States once legalization occurs here.”
But for now, the drug remains federally illegal in the U.S., although individual states, including most recently New York, have legalized it. The nationwide ban has largely kept institutional money out of the sector and is an obstacle to interstate and cross-border trade that crosses the U.S.-Canada border. Stock market volatility has also increased with a high percentage of shares held by retail investors.
Optimism over federal legalization has increased with the Biden administration, but remains a hypothetical one. National decriminalization would be crucial for a U.S. boom to begin in earnest, but analysts see the Senate’s passage of the SAFE Banking Act as a smaller cornerstone. The event would allow the cannabis industry to collaborate with U.S. financial services and insurance groups.
Month: Tilray’s shares soar after a reverse merger deal with Aphria, to create the world’s largest cannabis company
While some of Aphria’s competitors have delved into mergers and acquisitions in the U.S. through acquisitions that are conditioned by changes in U.S. law, Simon wants to keep Aphria on the sidelines for now.
Kristoffer Inton, a Morningstar analyst, told MarketWatch that U.S. assets with a positive exposure to legalization are attractive to private cannabis, alcohol and tobacco and Canadian groups. These assets are generally expensive, Inton said, and groups like Aphria must be careful not to overpay in the current optimistic environment or the frenzy of mergers and acquisitions that is achieved with legalization. “How will optimism translate into a real exposure without paying too much for the assets when everyone wants to?” Said Inton.
The most ambitious work Aphria did in the United States was the acquisition of craft brewery SweetWater last December, which gave the company an extra reliable sales channel for alcohol and exposure to cannabis-infused beverages. Consumable drug derivatives are widely regarded as the future of the industry and Tilray has a partnership with beverage giant AB InBev BUD,
Ultimately, analysts point out that inflated valuations in the cannabis sector have their roots in market prices at some level of U.S. legalization. While there is talk of expansion into Europe, Simon recognizes that America is critical to the future of stocks.
His game plan to launch in the US market is largely based on building successes in Canada and Europe. Simon’s ambitions are to grow Aphria and Tilray’s combined market share in Canada by between 20% and 30%, while maintaining a positive cash flow. It also wants to remain the largest medical cannabis company in Europe, even through the search for a strong strategic partner in the region, and to take advantage of relationships with regulators to obtain licenses in markets that legalize the recreational pot.
If Simon is successful, the company will create a healthy war chest for the next battle in the United States. SweetWater’s business is off to a good start, Simon said, and Tilray’s assets include hemp food producer Manitoba Harvest, which is active in the U.S. maybe that won’t be enough, and Simon knows it could be an expensive fight.
“I will try to acquire the right [multistate operator] once you know what the market will legalize or how the market will be legalized in the United States, ”Irwin said. “I’d rather pay a little more when I can get into a business where the facts are known.”
Aphria shareholders will receive 0.8381 Tilray shares for every Aphria share they own when companies merge, pending shareholder approval in the coming days. The group would operate under the Tilray name with the shares listed on Tilray’s listing on the Nasdaq. Simon will be the chairman and CEO of the combined company, of which Aphria’s shareholders would own 62%.
Shares of Aphria have risen more than 130% so far, while shares of Tilray have risen more than 140% since the beginning of the year.