APHA - A New Era For Aphria as Shareholders Approve Tilray Merger
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It’s official. Last Thursday, with more than 99% support from its shareholders, Aphria (NASDAQ:APHA) approved its takeover of Tilray (NASDAQ:TLRY). Assuming nothing unexpected comes up, the merger should close without much further delay. Despite the news, APHA stock has continued its recent downtrend.
That said, even discounting the past month, Aphria has enjoyed quite the turnaround. APHA stock was selling for as little as $3/share last year, and entered 2021 around $7. Now APHA stock is at $14.41, as of the morning of April 20, 2021. This is part of a broader trend for the marijuana industry.
In the Canadian market anyway, the initial gold rush has ended. We’ve moved into the maturation stage. Strong companies will consolidate their positions while weaker peers fade out of the picture. With the Aphria/Tilray deal, we’re seeing what should be the formation of one of Canadian marijuana’s power players.
Merger Mechanics
Once the merger is done, APHA stock will no longer trade as an individual listing. Rather, current Aphria shareholders will see their ownership exchanged for new shares of TLRY stock. Tilray will give Aphria owners .8381 shares of Tilray for every share of Aphria that they owned previously.
As of this writing, TLRY stock is selling for around $17.44. Based on that exchange ratio, APHA stock today would be worth $1461. Not coincidentally, that’s around where Aphria is trading. This confirms that the deal should close soon as arbitragers have largely closed the gap between the stocks.
While Aphria isn’t being taken over at its all-time valuation, this is still a great price for the company. For people that bought shares in 2019 or 2020, most have sizable gains based on this exit price. Do remember, however, that Aphria shareholders will be receiving Tilray stock, rather than cash. So there will still be no locked-in gains unless shareholders elect to sell those TLRY shares that they subsequently receive.
Why The Merger Is Needed
This Aphria/Tilray deal is product of the times. The initial boom in the Canadian cannabis industry quickly turned to a bust. Too many producers ramped up their cultivation operations in a hurry. Meanwhile, issues with regulation slowed down the rollout of cannabis retail stores. As a result, the marijuana market took off far more slowly than expected. In response, consolidation makes sense to adapt to these unfavorable developments.
Discussing the deal, Aphria’s CEO Irwin Simon said that: “We appreciate [shareholders’] support, as we believe the business combination will create a combined company with a strong financial profile, low-cost production, market share leading brands, distribution network and unique partnerships.”
Those first two points underline why this deal is such a great idea. Tilray and Aphria have both been struggling as standalone companies. Each firm regularly loses at least $100 million per year from their operations. And, troublingly, their losses haven’t really shrunk as their revenues have increased. So far, both firms have simply had too high a cost base to make money in Canada’s brutally competitive marketplace.
By combining forces, the combined Aphria/Tilray should be able to save at least $75 million in annual operating costs. This, in turn, should trim the company’s overall operating loss dramatically. Meanwhile, by uniting, the overall company will be by far the largest marijuana producer in Canada. This will give it benefits in terms of marketing for its products, and negotiating with suppliers on input costs.
APHA Stock Verdict
With the merger soon set to close, APHA stock won’t be with us for much longer. Thus, at this point, shareholders should ask themselves if they want to cash out here, or let their ownership roll into TLRY stock post-merger.
Tilray has had problems of its own, and it’s far from guaranteed that the combined company will be a success. However, this merger is a strategically sound move. By cutting costs and establishing more market share, Aphria and Tilray are putting themselves on much stronger footing. This sort of merger is the right path forward for the Canadian marijuana sector.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.
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