Tilray and Aphria are merging in a $4 billion deal, the largest in cannabis history. The CEOs explain why the new Tilray is a prime target for a strategic partner.

Tilray and Aphria are merging in a $4 billion deal, the largest in cannabis history. The CEOs explain why the new Tilray is a prime target for a strategic partner.

December 17, 2020
  • Canadian cannabis producers Tilray and Aphria are merging in a deal that would give the combined company a market cap of $4 billion and make it the largest cannabis company by revenue.
  • Aphria CEO Irwin Simon will remain the CEO of the combined company, which will take the Tilray name and trade on the Nasdaq. 
  • In a joint interview with BI on Wednesday morning, Aphria CEO Irwin Simon and Tilray CEO Brendan Kennedy discussed why the merger sets the combined company up for a major strategic partner.
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Canadian cannabis producers Tilray and Aphria are merging in a blockbuster deal that would give the combined firm a near $4 billion valuation and make it the world's largest cannabis company by revenue, the companies announced on Wednesday morning. 

Aphria CEO Irwin Simon and Tilray CEO Brendan Kennedy said in a Wednesday morning interview with Business Insider that the merger would be a boon to shareholders of both companies and that it would give the combined company an effective platform to take advantage of the potentially $100 billion US cannabis market. Aphria agreed in November to acquire the US brewer SweetWater Brewing Company and Tilray owns a US CBD business, Manitoba Harvest.

On top of that, it would also make the combined company an attractive target for a large strategic partner, like beer giant Constellation Brands' investment into cannabis rival Canopy Growth, or Altria's investment into Cronos Group.

Sending a message to potential partners

"A number of large strategic investors in the US, and a number of large strategic investors globally have been waiting to identify who are going to be the consolidators or what companies are going to consolidate the industry," Kennedy told BI.

"I think Irwin and I sent a message today with this combination," Kennedy said.

Read more: The cannabis industry is set for a wave of M&A after 5 states voted to legalize marijuana and the House voted to decriminalize cannabis. Industry insiders lay out who's going shopping and the types of deals you can expect.

Aphria CEO Irwin Simon said they're not looking to "find a partner for money."

"I think an attractive partner is going to bring us innovation, R&D research, that's a leader in their market today," he added. 

He gave the hypothetical example of tobacco giant Philip Morris's development of smoke-free tobacco products. Philip Morris does not yet have any exposure to the cannabis industry. 

When asked for specifics, Irwin declined to name any names, but said that "we get calls all the time." Tilray, for its part, has an existing partnership with AB InBev to produce marijuana-infused drinks in Canada, as well as a medical marijuana distribution agreement with pharmaceutical giant Novartis. 

Simon said it's possible that they'll expand on those deals as well as look at other partners. 

As well, both Simon and Kennedy said that there has been "lots of uncertainty" on the part of the largest US asset managers and mutual funds, who have mostly sat on the sidelines of cannabis due to regulatory hurdles and the uncertainty around which companies would emerge as the leaders. 

Despite the promises of cannabis legalization in Canada, the industry failed to gin up the returns that many investors, both institutional and retail, had hoped, resulting in massive write-downs, layoffs, and facilities closures as supply continually outpaced the demand for legal marijuana, financial analysts say. 

Both Aurora Cannabis and Canopy Growth have in recent weeks laid off hundreds of employees and closed facilities in an effort to cut costs.

Looking outside of Canada for profits

That dynamic has forced Canadian cannabis companies to look to the US and globally to expand, which is what's underpinning the merger, Simon said. He added that the combined company will be cash flow and EBITDA (earnings before interest, taxes, depreciation, and amortization) positive. Simon said the merger makes sense since Tilray's assets, such as a cannabis facility in Portugal, were complementary to Aphria's assets giving the combined company a broader footprint in more countries with little overlap. 

As for the US, five states voted to legalize marijuana or medical marijuana in November, and polls show that over 68% of Americans support legalization. though cannabis is still illegal federally. While the House passed the MORE Act, a bill to decriminalize marijuana, earlier this month, the bill faces dim prospects in a Republican-controlled Senate. Still, Cowen analysts expect the US to become a $100 billion cannabis market in the next decade. 

"I think something's going to happen with banking," Simon said. "I've got every bank texting me this morning. Matter of fact, I'm texting with a big bank right now, 'like why weren't we in this deal?'"

Simon said that as part of the merger, there won't be "big, restructuring write-downs." 

"That's why this combination made so much sense because we complement each other in so many different areas," Simon said.

The merger received mixed reviews from analysts.

"We are surprised at this announcement with questions around the potential value creation of merging at this stage of the industry's development with the implied discount to Aphria shareholders surprising in the context of what we regard as Aphria's stronger position," Stifel analyst Andrew Carter wrote in a Wednesday note.

Cowen analyst Vivien Azer said in a Wednesday note the combined company's management believes the merger would position them to become "an early leader" in the US marijuana industry.

Breaking down the deal terms

The all-stock deal, billed as a "reverse acquisition" of Tilray by the companies in a presentation to investors, will see Aphria shareholders receive 0.8381 shares of Tilray for each Aphria share they own. Aphria shareholders will own 62% of Tilray's stock, and the combined company will retain the Tilray name and trade on the Nasdaq under Tilray's ticker. 

Aphria will pay a 23% premium on Tilray's December 7 closing price of $7.87. Tilray's stock jumped 19% on the news, while Aphria's stock lost 0.9%

The deal, which is expected to close in the second quarter of next year, will give the combined company a combined revenue of C$874 million, or $685 million USD, slightly higher than US cannabis company and industry rival Curaleaf, per the company's investor presentation.

Read more: A top Wall Street analyst lays out why Green Thumb Industries is the best marijuana stock to buy now, and says it could soar 38%

The companies said the deal will provide $100 million in cost savings annually. 

Aphria CEO Irwin Simon will take over as CEO and Tilray CEO Brendan Kennedy will retain a board seat. The combined company will have nine board seats. 

Cowen served as financial advisor to Tilray and Jefferies advised Aphria. Cooley LLP and Blake, Cassels and Graydon LLP served as legal counsel to Tilray and DLA Piper and Fasken Martineau Dumoulin LLP served as legal counsel to Aphria.

Tilray CEO Brendan Kennedy has has sold 2.1 million shares since September 30, and holds around 10 million shares as of Wednesday, per data from Bloomberg. 

Tilray's stock has slid over 50% this year, while Aphria's stock has gained 72% this year.

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