Aphria and Tilray merge with one eye on European and American markets

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A worker checks the cannabis plants inside the greenhouse at the Tilray factory in Cantanhede, Portugal, April 24, 2019.

RAFAEL MARCHANTE / Reuters

Two of Canada’s largest cannabis companies are merging in an equity deal aimed at cutting costs and positioning the combined entity for possible changes to marijuana laws in the US and Europe.

The merger of Aphria Inc. Aphria and Tilray Inc., Tilray announced on Wednesday, is the first major takeover in Canada since the legalization of recreational cannabis in 2018. The combined company, which will continue as Tilray, will have the largest cannabis sales footprint in the country and an implicit stock valuation of nearly $ 5 billion. Current Aphria shareholders will control around 62% of the company.

The Canadian cannabis industry is widely seen as ripe for consolidation, but deals have been rare over the past two years. Much of the M&A boom that led to legalization was fueled by optimism that Canadian companies are also becoming big international players as cannabis has been legalized in other jurisdictions.

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But since then, most cannabis producers have sought to downsize rather than expand in the face of a glut of supply in Canada. and lower than expected consumer demand. The boom in mergers and acquisitions has been replaced by the constant shutdown of underutilized facilities across the country.

The agreement between Aphria, of Leamington, Ont., And Tilray, of Nanaimo, British Columbia, aims to share costs between the two companies. They believe they can achieve savings of around $ 100 million over the next two years by combining production assets, sales teams and reducing expenses.

“The market in Canada is well oversaturated, there are too many [licensed producers], There is too much [growing capacity] for the size of the market here, ”Aphria CEO Irwin Simon, who will lead the combined company, said in an interview.

Aphria spoke to several potential partners earlier in the year. Ultimately, a deal with Tilray made the most sense, Simon said, as there is no significant asset overlap. Tilray buys most of its cannabis wholesale rather than growing it, while Aphria has underutilized the capacity of its huge greenhouses in Leamington. Tilray brands are strong in Quebec, while Aphria products sell well in Ontario.

“We are not closing the assets and we are not blocking all of this [capital expenditure] … Tilray has about 35,000 kilograms that can be transported through our facilities and there is a lot of absorption in our current facilities, ”said Mr. Simon.

Along with the potential cost savings in their Canadian operations, the transaction is presented as a game of renewed growth in international markets where companies believe they have complementary assets.

Tilray has a large growth facility in Portugal, while Aphria owns a drug import company in Germany, giving the combined entity a production and distribution network within the European Union, where approximately half countries have legalized some form of medical marijuana.

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Tilray and Aphria also own businesses in the United States, although they are not directly related to cannabis. Cannabis remains federally illegal in the United States, so neither company can conduct “plant-related” activities there without risking being delisted from the Nasdaq or the Toronto Stock Exchange.

The election of Joe Biden as president has given pot stocks a dose of adrenaline, as investors bet a Democratic-led government will push for federal legalization of recreational cannabis. But with the Senate still controlled by Republicans, significant legislative change may be a long way off.

In the meantime, Aphria and Tilray are both trying to build brands and distribution channels obliquely in the United States. Tilray owns a hemp-based food company, Manitoba Harvest, which operates south of the border, while Aphria recently purchased SweetWater Brewing Co. for the United States. $ 300 million. The plan is to have SweetWater beer branded with Aphria’s cannabis brand names.

The deal comes after a turnaround at Aphria over the past two years. In late 2018, the company was the subject of a short seller report that Aphria overpaid for assets in Latin America and the Caribbean that were owned by people close to the management of the company. . The allegations torpedoed the company’s stock price and reverberated throughout the industry. Aphria CEO Vic Neufeld has resigned.

Mr. Simon, the longtime head of the Hain Celestial Group, a multi-billion dollar food and personal care company based in Long Island, New York, has been recruited.

“You go back two years ago, around this time, we did a brief report, we had a hostile takeover [bid], we had to give up assets, we had to clean up the C-Suite. We needed a transformational type of deal that really went beyond Aphria, ”said Simon.

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Tilray, for its part, has struggled to meet investor expectations after going public during the heady days of the cannabis market bubble. After its IPO in July 2018 at US $ 17 per share, its small number of available shares – around 10 million – and its status as the sole seller of pots on the Nasdaq at the time caused a frenzy that spurred shares at US $ 300 in September. .

But, from a peak in cannabis stocks in October 2018 to trading on Tuesday, Tilray shares fell 96.4%, according to S&P Global Market Intelligence, making it one of the worst pot stocks among a multitude of bad performers.

The deal with Aprhia offered Tilray shareholders a 23% premium over the company’s closing share price of $ 7.87 on Tuesday. Tilray shares jumped 18.5% on Wednesday to close at US $ 9.33.

Tilray’s longtime CEO, Seattle-based financier Brendan Kennedy, will step down but remain director of the company.

With files from David Milstead

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