AnalysisBeveragesM&AUSAnalyst lukewarm on Aphria’s US$300M SweetWater acquisition

Chris Damas of BCMI is skeptical the craft beer deal will give the Canadian producer a strong foothold in the US
Jared Gnam Jared GnamNovember 5, 20208 min

Aphria Inc. (TSX: APHA) agreed to pay US$300 million to buy SweetWater Brewing Co., a deal at least one analyst is skeptical will actually give the Canadian producer a foothold in the American weed drink space.

Aphria said late Wednesday it plans to acquire the Atlanta, Georgia-based craft beer company, which sells 420-branded beverages with natural hemp flavours that have been a hit with stoners for decades.

But in a note Thursday, BCMI cannabis analyst Chris Damas recommended that Aphria investors sell some company stock on the news. While Aphria shares surged 9 per cent on the Toronto Stock Exchange today, Damas noted that the company will be diluting its stock by selling some into the market to pay for the acquisition.

He also voiced skepticism that the deal will forge a clear path for Aphria to capitalize on the U.S. cannabis beverage market.

“I understand the attraction of buying branded beverage companies in the U.S., in anticipation of federal rescheduling of cannabis,” he wrote. “But there are no synergies in Aphria buying a beer company.”

Founded in 1997, SweetWater has built a distribution network that spans 27 states and Washington D.C. The craft beer products, which emulate the flavors and aromas of popular cannabis cultivars, are sold in 29,000 retail locations ranging from independent bottle shops to national chains.

SweetWater’s 420 Extra Pale Ale brand is served on all Delta flights reaching an international audience from 50 countries across six continents, according to a statement. The brand is the best-selling craft beer in the U.S.

Aphria says it will leverage SweetWater’s marketing and distribution expertise to build brand awareness for the company’s Canadian cannabis brands in the U.S. ahead of expected federal legalization. CEO Irwin Simon says his company will begin by selling hemp-infused craft beers with SweetWater while using its Broken Coast, Good Supply, Riff and Solei banners.

The Canadian producer expects the deal will immediately bolster its earnings before interest, taxes, depreciation and amortization.

In the 2019 calendar year, SweetWater generated net revenue and adjusted EBITDA of US$66.6 million and US$22.1 million, respectively. Production volume increased 7 per cent year-over-year, twice the growth rate of the craft beer market nationally, Aphria says.

The deal is US$250 million in cash and US$50 million in stock, and is expected to close by the end of the year.

Read more: Aphria shares tank on weak international sales

Image via SweetWater

Aphria, Canadian cannabis, face winding road in US, BCMI says

“Aphria has made some bogus acquisitions in the past and I am not convinced this makes sense,” Damas says.

In April 2019, Aphria had to write down $50 million worth of its controversial Latin American assets, which it acquired in 2018.

Because companies can’t combine alcohol with THC in a single product in either Canada or the U.S., Damas questions how sweet the new deal will be for Aphria to produce THC-infused beverages in either countries, if that’s its eventual strategy.

The transaction comes one day after the U.S. election, which drew mixed results for investors in Canadian cannabis companies. That’s because they’ll have a harder time breaking into the U.S. weed market because Democrats failed to take the Senate and presidential results remain unclear.

Shares in Canadian weed heavyweight Canopy Growth Corp. (TSX: WEED) fell almost 10 per cent Wednesday, but rebounded more than 11 per cent Thursday.

Beverage giant Constellation Brands Inc. bought a 37 per cent, or $5 billion stake in Canopy , which plans to expand in the U.S. if and when cannabis is legalized at the federal level.

In Damas’s view, the market still doesn’t know how to accurately value deals between cannabis companies and other established industries like big pharma and beverage.

Aphria is paying 13.6 times EBITDA for SweetWater, he notes.

But the Leamington, Ontario-based company is bullish on the deal, citing several financial and strategic benefits.

Once both companies combine, Aphria says, annualized pro-forma revenue and adjusted EBITDA would be $650-675 million, and $65-70 million, respectively.

With its CC Pharma distribution business in Germany, the company will now have two big divisions that are not directly related to cannabis.

Top image via SweetWater

 

jared@mugglehead.com

@JaredGnam

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