The combined company will keep the Tilray name, trade under the NASDAQ symbol (TLRY), and be led by Aphria chief executive officer Irwin Simon. Tilray CEO Brendan Kennedy will serve on the company’s board.
Under the terms of the deal, Aphria shares will be exchanged for 0.8381 of a Tilray share. Tilray shareholders will retain their existing shares. The ratio implies Aphria shareholders will own 62 per cent of the combined company’s common stock, and a 23 per cent premium to the closing price of NASDAQ-listed Tilray shares on Tuesday.
The all-stock deal will create an entity with an equity value of about $4.8 billion, leaping ahead of Aurora Cannabis (ACB.TO)(ACB) at $2.4 billion, but well behind Canopy Growth’s (WEED.TO)(CGC) $12.6 billion market capitalization.
“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,” Simon stated in a news release on Wednesday.
Shares of Tilray climbed 20.08 per cent to $9.44 at 9:50 a.m. ET. Aphria’s NASDAQ-listed stock added 1.55 per cent to $8.23.
Aphria and Tilray said the combined entity will be the “largest global cannabis company,” having generated a total of $874 million in sales over the last 12 months. The deal is expected to bolster Aphria’s top position in Canada’s $3.1 billion recreational market.
“The combined company will have a market share approaching 20 per cent, the largest share held by any single licenced producer in Canada, and 700 basis points higher than the next closest competitor,” Simon told investors on a conference call on Wednesday.
The combination of Aphria and Tilray is expected to deliver approximately $100 million of annual pre-tax cost savings within two years of the completion of the transaction. Tilray would no longer need to purchase wholesale cannabis from other producers.
The new Tilray entity plans to establish a nine-member board, with seven seats occupied by Aphria directors. Principal offices will be maintained in New York, Seattle, Toronto, Leamington, Ont., Vancouver Island, Portugal and Germany.
“One of the big things that I really liked about this deal [is] it’s not like we’re left with all these grow facilities that we have to close,” Simon said, referring to the wave of shutdowns and staff layoffs that has swept the industry following the early days of cannabis legalization, when investors rewarded companies for rapid expansion.
Aurora announced on Tuesday that it will idle most of its flagship greenhouse facility in Edmonton, resulting in 214 people being laid off. Last week, Canopy Growth shut down five Canadian facilities, resulting in 220 laid off workers.
Simon and Kennedy said the deal increases their potential to take advantage of emerging international markets, especially the United States and Europe.
In the U.S., the company will leverage Aphria’s newly acquired craft beer company, Sweetwater Brewing, to introduce its brands through CBD-infused beverages. Tilray is partnered with beer giant Anheuser-Busch InBev (BUD) on a joint venture called Fluent, which sells beverages in Canada under the Everie brand. Simon said there’s an interest in using Tilray’s Canadian beverage operations to get Aphria into making drinks containing THC, the main intoxicating ingredient in cannabis.
“Drinks are big opportunities,” Simon said, downplaying sluggish sales representing 1.5 per cent of Canada’s total cannabis market, according to retail data from HyFyre. “Having Sweetwater and ABI, we have some pretty good partners to work on products that taste good.”
Much of the recent focus in the cannabis industry has been on the U.S. market in the wake of Joe Biden’s election to the presidency, which is seen as paving the way to federal legalization. However, Simon said he expects regulations to ease in more European nations before the United States.
“We keep focused on the U.S., the U.S., the U.S. I believe Europe will legalize in many of its countries before the U.S. does,” he said.
The combined company will leverage Aphria’s sizeable German medical cannabis business, CC Pharma, and its European operations, plus Tilray’s cultivation and production facility assets in Portugal, to address demand on that continent.
“Our combined company will be well positioned to pursue growth opportunities with our end-to-end, EU GMP supply and distribution chain,” Kennedy said.
“From a free trade standpoint, we can ship anywhere in Europe,” Simon added.
Advanced talks between Aphria and Tilray were first reported by BNN Bloomberg and CNBC on Tuesday afternoon. The deal has not been approved by regulators or shareholders. The arrangement includes a $65-million reciprocal break fee if either side abandons the deal.
Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.