Aphria (APHA) and Tilray (TLRY) have announced the two companies would be merging. Aphria shareholders will receive 0.8381 shares of Tilray’s for each Aphria stock they own. Aphria will own about 62% of the combined company, however, the merged company will supposedly be known under the Tilray name and would trade with the TLRY stock ticker. Both stocks moved higher on the news, which neither company has commented on.
The combined revenue of the two companies would be approximately $685 million, making it the largest in terms of sales, but the combined market cap is still lower than competitor Canopy Growth (NASDAQ: CGC). Aphria said in a statement that the implied pro forma equity value of the Combined Company is approximately C$5.0 billion (US$3.9 billion), based on the share price of Aphria and Tilray at the close of the market on December 15, 2020. Aphria’s current Chairman and Chief Executive Officer, Irwin D. Simon, will lead the Combined Company as Chairman and Chief Executive Officer. The board of directors will consist of nine members, seven of which, including Mr. Simon, are current Aphria directors and two of which will be from Tilray, including Brendan Kennedy, and one of which is to be designated.
“This is an exciting day for both companies including our 2,500 employees, for the cannabis industry, and for patients and consumers around the world. We are bringing together two world-class companies that share a culture of innovation, brand development and cultivation to enhance our Canadian, U.S., and international scale as we pursue opportunities for accelerated growth with the strength and flexibility of our balance sheet and access to capital,” said Mr. Simon. “Our highly complementary businesses create a combined company with a leading branded product portfolio, including the most comprehensive Cannabis 2.0 product offerings for patients and consumers, along with significant synergies across our operations in Canada, Europe, and the United States. Our business combination with Tilray aligns with our strategic focus and emphasis on our highest return priorities as we strive to generate value for all stakeholders.”
Tilray’s Sales Have Been Disappointing
In November, Tilray reported that its total revenue for the third quarter was flat at $51.4 million and up 2.0% sequentially. The company attributed the disappointing results to the discontinuation of bulk sales and a slight decrease in Canada medical sales which caused cannabis segment revenue to fall by 11% to $31.4 million. Total cannabis kilogram equivalents sold decreased 53% to 5,107 kilograms from 10,848 kilograms in the prior year’s third quarter. Adult-Use and International Medical sales grew 26% and 42%, respectively. Excluding the year-over-year impact related to bulk sales, total cannabis revenue increased by 24%. Hemp segment revenue increased 28% to $20.0 million (C$26.5 million).
Mr. Kennedy, Tilray’s Chief Executive Officer added, “We are thrilled to bring together two cannabis industry leaders. At this nascent stage of development and expansion of the global cannabis market, we believe companies with leading geographic scale, product range and brand expertise are most likely to benefit long-term. By leveraging our combined strengths and capabilities, we expect to be able to meet the needs of consumers more effectively all over the world and advance patient care. With a strong financial profile, low-cost production, leading brands, distribution network and unique partnerships, we believe the Combined Company will be well-positioned to deliver sustainable, attractive returns for stockholders. I look forward to working with Irwin and the Combined Company’s management team to make our consumer products more accessible around the world.”
Aphria’s Position Of Strength
Aphria has been delivering much better results as the company reported in October that its gross revenue was $69.6 million in the first quarter for the fiscal year 2021. This represented strong growth, showing a 23% increase from the prior quarter, as well as the sixth consecutive quarter of growth. The company’s net cannabis revenue totaled $62.5 million, showing a whopping increase of 103% from the same quarter last year. The company reported an adjusted EBITDA of $10.4 million for the cannabis business, representing an 11% increase from the prior quarter.
Aphria’s total net revenue from the first quarter reached $145.7 million, an increase of 16% from last year’s quarter. The company did report a 4% decrease in total net revenue from the prior quarter, however, this is solely due to circumstances and lower distribution revenue stemming from COVID-19, specifically from CC Pharma in Germany. Especially considering the COVID-19 curve balls that every company has had to navigate, Aphria ended the first quarter with a bang. They finished with a strong balance sheet and liquidity; which includes $400 million of cash and cash equivalents to fund the company’s growth, both in Canada and internationally.
Aphria in November said it would enter the U.S. via an agreement to buy craft brewer Sweetwater Brewing Co. for around $300 million. SweetWater is known for beers that use terpenes and hemp flavoring. Aphria said the brand was “closely aligned with a cannabis lifestyle.” Tilray owns Manitoba Harvest, a hemp company that sells products in the U.S. and Canada.
In the Aphria statement, the company said that 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. In the United States, Aphria said that the Combined Company will have a strong consumer packaged goods presence and infrastructure with two strategic pillars, including SweetWater, a cannabis lifestyle branded craft brewer, and Manitoba Harvest, a pioneer in branded hemp, CBD and wellness products with access to 17,000 stores in North America.
The combination of Aphria and Tilray is expected to deliver approximately C$100 million of annual pre-tax cost synergies within 24 months of the completion of the transaction. The Combined Company expects to achieve cost synergies in the key areas of cultivation and production, cannabis and product purchasing, sales and marketing, and corporate expenses.