Aphria and Tilray to merge, creating CA$5 billion global cannabis giant

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(This story has been updated with more details and comments.)

Canadian cannabis companies Aphria and Tilray on Wednesday announced plans to merge, a transaction that would create a giant international marijuana firm with combined equity value of approximately 5 billion Canadian dollars ($3.9 billion).

The merged company would be the “world’s largest global cannabis company” based on pro forma revenue of CA$874 million over the past 12 months, the companies said in a joint news release.

Under the merger, the combined company would operate under the Tilray name, with head offices in the United States, Canada, Portugal and Germany.

In addition to competing in Canada’s recreational marijuana market, Aphria and Tilray said the new company would be “well-positioned” to pursue European growth opportunities, building on Aphria’s German assets and Tilray’s Portugal production facility.

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

“The combined company is expected to have a strong, flexible balance sheet, cash balance and access to capital, giving it the ability to accelerate growth and deliver attractive returns for stockholders,” Tilray and Aphria in the release.

Under the deal, structured as a reverse acquisition of Tilray, each Aphria shareholder would receive 0.8381 Tilray shares for each Aphria share held, meaning Aphria shareholders would own roughly 62% of outstanding Tilray shares.

That represents a 23% premium over Tilray’s share price at market close on Tuesday.

The combined firm would be led by Aphria CEO Irwin Simon and a nine-person board of directors – seven directors from Aphria, including Simon, and two from Tilray, including Tilray CEO Brendan Kennedy.

Cost-saving synergies from the combination would total approximately CA$100 million within 24 months, the companies said.

Management commentary

During a Wednesday morning conference call and investor presentation, Aphria and Tilray executives said the merger is expected to close in the second quarter of 2021, subject to approvals from shareholders, regulators and courts.

Simon said he aims to capture at least 30% market share in Canada.

He also articulated a bullish outlook for the combined company’s European operations, saying he sees “a good chance” for recreational legalization in Germany and Portugal in 2021. Germany rejected a recreational legalization bill in October.

As for the company’s U.S. plans, Simon noted that the combined company still won’t be able to operate there in a plant-touching capacity.

“But when (U.S.) legalization does happen,” he said, “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, to create something, will be at our fingertips to go ahead and do it.”

Simon also said the merged company plans to look at new acquisition opportunities.

Kennedy said he believes it’s “extremely likely” that every European Union country will legalize medical marijuana in the next two years, particularly in light of a recent United Nations vote to reschedule cannabis.

“There are tremendous opportunities for growth, not only in the existing European market but in in new markets, medically, such as France,” he said.

“I think that is going to lead to more conversations around adult-use legalization in Europe, occurring not only in 2021, but in the following years.”

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

Europe’s regulated medical cannabis industry saw 240 million euros in sales in 2019, according to MJBizDaily‘s report, “Medical Cannabis in Europe: The Markets & Opportunities.”

Analyst reaction

Pablo Zuanic, equity analyst for New York-based Cantor Fitzgerald, estimated that the combined company would have almost 19% recreational market share in Canada, based on data from the Hifyre point-of-sale platform.

The merger “makes sense,” Zuanic wrote in a Wednesday morning research note, because Canada’s cannabis sector “is ripe for consolidation, given oversupply issues, historically low flower retail prices” and asset and cost bases that are mostly “misaligned with the industry’s current state of development” in Canada and abroad.

“We believe other mergers could follow in the Canadian space,” Zuanic wrote.

“We believe this deal with further cement the combined entity as the No. 1 player in the Canadian sector,” equity analyst Matt Bottomley of British Columbia-based Canaccord Genuity wrote in a research note on Wednesday.

In terms of U.S. plans, Bottomley wrote that he expects the combined company “to carve out a meaningful (consumer packaged goods) presence … While looking for opportunities to gain exposure to cannabis south of the border once/if regulations allow.”

New York-based Cowen’s equity research team observed Wednesday that the merger’s attendant cost synergies will “(add) to (Aphria’s) track record as the only Canadian (licensed producer) to consistently produce meaningful positive quarterly EBITDA.”

Cowen’s investment banking arm is advising Tilray in the merger.

An Aphria spokesperson did not immediately reply to a query from MJBizDaily regarding any potential job cuts after the merger is finalized.

Tilray shares trade as TLRY on the Nasdaq exchange, and Aphria shares trade as APHA on the Nasdaq and the Toronto Stock Exchange.

Solomon Israel can be reached at solomon.israel@mjbizdaily.com