🍁Aphria reverse merges w/ Tilray (all stock) to form $3.9B Company (TLRY)

Combined Company becomes the largest global Cannabis company based on revenue (pro forma $685M)

CAD:USD = 0.78, TLRY closed today (12/16) +18.5% ($9.33), a bit short of the $9.68/share price used for the reverse merger (+23% premium to 12/15 closing price of $7.87).

A month after Aphria acquired SweetWater to “enter” the U.S., it has doubled down on that U.S. entry strategy by acquiring Tilray (and it’s mostly U.S. Hemp business, Manitoba Harvest, which Tilray acquired for up to C$419M in February 2019 and Beverage capabilities/JV with AB InBev). The combination makes sense as consolidation picks up in a maturing Cannabis industry (and more so, the Canadian Cannabis market), dressing up the Combined Company for a strategic investor to inject a large amount of cash into ($500M+), and at least in the near-term, allows the Combined Company to raise cash to improve change its net debt to a net cash position.


Why I think the deal happened / A prediction on the next deal:

Consolidation was necessary. Canadian LPs (of which, there are 505!) needed to consolidate given oversupply issues, lower than expected retail prices, and assets that were built for much larger capacity projections at the time. Improving its ability to compete in Canada was reason enough to do the deal, but the Combined Company will need to figure out a real U.S. entry point (a la Canopy Growth’s call option with TerrAscend and Acreage) as one of the chart included in its investor presentation told the story (4 of the top 6 Cannabis companies based on global revenue are U.S. operators).

Improved access to capital. Expected to help accelerate global growth and value for the Combined Company’s stakeholders. In order to keep pace with Canopy ($1.2B Net Cash) and Cronos ($1.7B Net Cash), the Combined Company will look to improve on its $362M Net Debt.

Strategic partner. Aphria / Tilray likely wants find a strategic partner to cut a big check, rather than just a JV. AB InBev is a likely choice as it would a logical partner to expand SweetWater’s “cannabis lifestyle branded craft beer” and already has a JV with Tilray (Fluent) for CBD-infused beverages in Canada. The Tilray/AB relationship was called out on the investor call as a potential benefit. I believe I heard Irwin Simon mention a SwetWater/ABI distribution is something they’re exploring. Several Analysts on the Q&A portion asked about the ABI potential, so I’d imagine it’s top of mind for management.

Cronos + Auora? Cronos has the cash/strategic partner (Altria) and Aurora’s market share in Canada has been further weakened (now a distant 3rd behind Tilray + Aphria and Canopy). Aurora benefited from the U.S. election run-up but will soon need to provide some real reasons to justify it’s valuation ($1.6B Market Cap / $9.82 as of 12/16). By the way, Savvy move by Aurora to sneak in a some layoffs while everyone was talking about this Tilray + Aphria deal. Another possibility is for Aurora (or Cronos) to go after Village Farms which reported C$22.6M of Revenue / C$5.6M EBITDA in its most recent quarter and seems to be one of the better Canadian LPs, operationally.


Transaction:

  • Pro forma equity value of the Combined Company is ~C$5.0B ($3.9B), based on the share price of Aphria and Tilray at market close (12/15/20)

  • Principal offices in the United States (New York and Seattle), Canada (Toronto, Leamington and Vancouver Island), Portugal and Germany, and it will operate under the Tilray corporate name with shares trading on NASDAQ (TLRY)

  • Exchange Ratio: Aphria shareholders will receive 0.8381 shares of Tilray for each Aphria common share, while holders of Tilray shares will continue to hold their Tilray shares with no adjustment to their holdings

  • Aphria Shareholders will own ~62% of the outstanding Tilray Shares while Tilray shareholders will own ~38%

  • On a pro forma basis for the last twelve months reported by each company, the Combined Company would have had revenue of $685M ($232M adult-use gross revenue). Pro Forma cash for the Combined Company is $454M with $816M of debt ($362M Net Debt), which is expected to be deleveraged through growth and improved cash flow (half of which is contributed by SweetWater in Q1 2021)

  • Expected to close Q2 2021

Rationale:

Scale & Efficiency. Creates the largest global Cannabis Company (a slight lead over Curaleaf) with low-cost, state-of-the-art cultivation, processing, and manufacturing facilities, complete portfolio of branded Cannabis 2.0 products in Canada.

#1 Market Share in Canada. On a pro forma basis, for the period August to October 2020, the Combined Company would have held a 17.3% retail market share, the largest share held by any single Licensed Producer in Canada and 700 basis points higher than the next closest competitor, Canopy Growth. The Combined Company aims to capture 30%+ market share in Canada.

Complete Product Portfolio. Aphria and Tilray’s complementary brands will be available across economy, value, core, premium and premium plus product offerings.  In addition, the Combined Company will have a complete breadth of products in every major cannabis category, including flower, pre-roll, oils, capsules, vapes, edibles and beverages.

International (Europe). Well-positioned to pursue growth opportunities with Aphria’s medical cannabis and distribution footprint in Germany (13,000+ pharmacies), and Tilray’s 2.7M sq ft European Union Good Manufacturing Practices (EU-GMP) low-cost cannabis production facility in Portugal, which has export capabilities and tariff-free access to the European Union (EU) to meet increasing global demand for medical cannabis. Irwin Simon (CEO) has 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. Brendan Kennedy, Tilray CEO, believes it’s “extremely likely” that every EU country (14 —> 28) will legalize medical marijuana in the next two years, particularly in light of a recent United Nations vote to reschedule cannabis, an existing Germany medical market and medical experiment in France (~448M EU population).

Canada. Leading adult-use cannabis company with gross revenue of C$296M ($232M) in the adult-use market for the twelve months reported by each company. Aphria has generated positive adjusted EBITDA over the last six quarters, which in combination with the synergies to be realized, provides a robust platform for future profitability and cash flow generation.

United States. Strong consumer packaged goods (CPG) presence and infrastructure with two strategic pillars, including SweetWater and Manitoba Harvest (7,000 stores in North America). When U.S. regulations allow, the Combined Company expects to be well-positioned to compete in the U.S. cannabis market given its existing strong brands and distribution system in addition to its track record of growth in consumer-packaged goods and cannabis.

Team. Aphria’s current Chairman and CEO, Irwin D. Simon, will lead the Combined Company as Chairman and CEO. Brendan Kennedy will keep a board seat, but doesn’t seem to be staying involved day-to-day, otherwise, I would have expected a President role (or similar) as a part of this announcement.

Board. 9 members (7 current Aphria directors & 2 Tilray, including Brendan Kennedy, and 1 to be designated)

Employees. 2,500+ employees

Synergies. ~$78M of annual pre-tax cost synergies (cultivation and production, cannabis and product purchasing, sales and marketing and corporate expenses) within 24 months of the completion of the transaction. Aphria’s Leamington, Ontario operations to provide additional volume for Tilray’s brands and to replace the need for Tilray to use wholesale cannabis purchases from other licensed producers. Tilray’s London, Ontario facility will also provide Aphria with excess capacity to increase production of additional form factors including their branded edibles and beverages. If the Combined Company is able to show execution/execute on the cost synergies, the improvement in EBITDA would add ~$2B in Enterprise Value (based on 10-20x 2022E EBITDA).

Links:

Press Release

Investor Presentation

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👋 Blog written by Dai Truong, who leads 🌿brand and 🏪retail acquisitions at Left Coast Ventures, a CA-based Cannabis holding company.