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Tuesday, Dec 5, 2023
Mugglehead Magazine
Alternative investment news based in Vancouver, B.C.


Writedowns and growing pains ahead for Tilray 2.0, analyst says

But Chris Damas of the BCMI Cannabis Report notes the Aphria-merged firm will command a strong presence in Europe’s medical cannabis market

Tilray-Aphria deal closes, creating Canadian pot market leader
Tilray-Aphria deal closes, creating Canadian pot market leader

Two rival mega-producers —  Tilray Inc. (Nasdaq: TLRY) and Aphria Inc. (TSX: APHA) — completed their blockbuster merger, forming one of the biggest cannabis companies in the world.

On Monday, Tilray said its shareholders voted Friday in favour of issuing stock to Aphria’s shareholders. But the Nanaimo, B.C.-based company has yet to reveal how many supported the proposal.

Over 99 per cent of Aphria shareholders voted in favour of the merger in April.

The new companies will have a leading 17 per cent market share of the Canadian adult-use market, according to Tilray.

But trying to further grow sales in Canada’s highly turbulent, oversupplied pot sector could be difficult for Tilray, says Chris Damas, managing editor of the BCMI Cannabis Report.

“I foresee more competition for Tilray in Canada, as ‘factory weed’ — with the main attraction being low price — loses share to the premium cannabis makers,” he tells Mugglehead in an email.

Tilray-Aphria deal closes, creating Canadian pot market leader

Aphria’s 1.3 million square-foot greenhouse in Leamington, Ontario. Press photo

Because provincial cannabis distribution boards ultimately control sales in the country, Damas notes that licensed producers have to work extra hard to convince each province to take on more of their product.

“If the provincial board sneezes, the LP catches a cold,” he writes.

Another issue is how producers can’t market directly to consumers. But at least cannabis is a vice and people need their drugs, Damas says, so money is no object.

In Canada, Damas predicts writedowns for Tilray 2.0 as it streamlines its business, which will likely lead to shuttering of the old Tilray’s greenhouse in Petrolia, Ontario.

The new entity will generate up to $100 million in annual pre-tax cost-saving synergies within 18 months, Tilray says.

But Tilray’s hydrocarbon extraction lab as well as its edibles and beverages plant in Ontario are both a keeper, Damas says, as Aphria didn’t have these capabilities.

The new firm will operate using the Tilray corporate banner, with shares trading on the Nasdaq Tuesday under the ticker symbol TLRY.

However, the deal faced hurdles after it was announced in December.

Last month, Tilray postponed its shareholder vote and amended its bylaws to reduce the required quorum for shareholder meetings.

Read more: Tilray reduces required shareholder vote count to 1/3 for Aphria merger

The combined company will boast one of the biggest market caps in the cannabis space of approximately $10 billion based on the closing stock prices at the end of April, according to Tilray’s statement.

The new entity will be led by Aphria CEO Irwin Simon, and Tilray CEO Brendan Kennedy will take a seat on the new company’s board.

The cannabis powerhouse will also boast operations in pharmaceutical, beer and hemp industries across Europe, Canada and the United States.

Tilray-Aphria deal closes, creating Canadian pot market leader

Tilray’s E.U. Campus in Portugal is a multi-faceted production facility that includes indoor, outdoor and greenhouse cultivation sites. Press photo

Aphria-Tilray merged firm could dominate EU market with US companies landlocked

The companies have stated that they plan on being a major player in Europe’s small but expanding medical cannabis sector. Tilray operates a Good Manufacturing Practice-approved medical facility in Portugal, which can ship products into any European country that allows cannabis sales. 

In the next few years, Damas says Tilray could lead the continent in sales because big American players will remain largely domestic as they can’t deal internationally in cannabis until the U.S. legalizes federally. The analyst doesn’t expect major weed reform to happen under a Joe Biden administration.

In its last quarter before the merger, Aphria recorded $153 million in revenue, with only about 33 per cent coming from cannabis. The firm posted  57 per cent of its revenue from its European drug distribution business and 10 per cent from alcohol beverages via its SweetWater Brewing business in the U.S.

Read more: Aphria blames slump on Covid despite steady market growth

Read more: How Aphria is fighting for more market share: marketing VP Q&A

Tilray recorded about 73 per cent of its quarterly revenue in medical and recreational cannabis operations in Canada and the rest from its hemp business Manitoba Harvest, which operates in both Canada and the U.S.

Under the agreement’s terms, Aphria shareholders will get 0.8381 shares of Tilray for each common share of Aphria they hold. That means Aphria shareholders would own roughly 62 per cent of outstanding Tilray shares, making the deal a reverse acquisition of Tilray.

While Tilray shareholders approved the Aphria merger, they voted against increasing the company’s authorized capital stock from more than 743 million shares to 900 million shares.

Shares of Aphria halted traded on the Nasdaq on Monday, and are set to be removed from the Toronto Stock Exchange on Wednesday.

Tilray shares dropped 7.2 per cent Monday to US$17.02 on the Nasdaq.

Top image via Tilray

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