In order to move forward from a position of strength, Canadian cannabis producers Aphria ($APHA) and Tilray ($TLRY) announced a merger on December 16th, 2020 in an all-stock deal. The agreement will eliminate the Aphria name as a standalone brand, establishing it as a Tilray business unit.
Find out the details about this deal, what it means for the companies, and how this could be an indicator for an industry-wide shift by reading on.
Details of the Deal
The $4B merger will bring together the two firms and establish them as the largest global cannabis company, under the name of Tilray.
Aphria shareholders will be awarded 0.8381 shares of Tilray, for every share of Aphria that they own, once the merger has been finalized. This will result in Aphria shareholders owning roughly 62% of outstanding Tilray shares, completing the reverse acquisition.
Combined, the companies have recorded 685M USD in revenue over the last 12 months, according to the associated press release, with Canadian sales accounting for approximately 232M USD of this amount. In terms of sales, Tilray will become the largest cannabis company in the world.
Aphria CEO and Chair, Irwin Simon, will be taking over the same roles in the combined company, while current Aphria directors will occupy seven of nine seats on the new board, with the two remaining seats allocated to Tilray.
Tilray founder and CEO, Brendan Kennedy, will retain a board seat but will no longer be a member of the C-Suite. After a year of decline, it’s likely that a decision was made by the board in favour of Simon, as head of the company.
Why Merge? Why Now?
As in any industry, you can achieve economies of scale by increasing the volume of your production operations.
By increasing your buying power to suppliers and vertically integrating the rest of your process, you can attain efficiencies that were otherwise out of your reach. At its base level, the merger allows the companies to attain a stronger competitive advantage when combined, compared to the rest of their peers.
The combined company is anticipating over 78M USD in cost savings in key areas of the organization, including cultivation and production, purchasing, sales, marketing, and corporate expenses.
As the individual companies performed similar, yet slightly different functional tasks, this merger removes some supply/purchasing decisions, allows more efficient use of existing facilities, and generally speaks to the hope of improvement by bringing Aphria decision-making into Tilray’s operations.
With investors and companies alike anticipating U.S. legalization just around the corner, this move sets up the new-and-improved Tilray to move into the U.S. market early and establish a presence as soon as possible. With the expected cost savings and potential for increased revenues following the deal, Tilray is able to be aggressive in its expansion plans and eliminate the worry of another Canadian competitor.
Is this Similar to the Airline Industry?
Yes, you read that right – the airline industry.
You may be thinking that airlines have no place being compared to cannabis and, in most ways, you’d (obviously) be correct. However, the cannabis industry strangely seems to be shadowing a similar trajectory to airlines, with this merger increasing the parallels.
Since 2000, the number of North American airlines has more than halved as smaller airlines went out of business to achieve economies of scale. Large, crippling events such as 9/11 and the 2008 financial crisis caused air travel to substantially decrease and weakened airlines to fail.
Larger companies such as United Airlines and American Airlines consolidated the failing businesses and built themselves into giants within the industry… and now the same could be happening to the cannabis industry.
Cannabis investments were the hottest trend a couple of years back but since then, investing in cannabis has been faced with ridicule and disdain. Many of the smaller businesses have failed while the large companies bleed capital, putting cannabis in a similar position to 2001 airlines. The questions now stands whether this merger marks the beginning of an industry-wide consolidation effort as more established players reign supreme, or if potential U.S. legalization has enough to boost the industry back up to a better place.