After merger with Aphria, Tilray remains a smart buy

The mega-merger between Canadian cannabis companies Aphria and Tilray (NASDAQ: TLRY) has been the highlight of the marijuana industry this year. The deal was made on May 3 and the “new” Tilray was formed and, in the process, became the world’s largest cannabis company in returned.

The Aphria legacy has always been a strong contender in the cannabis arena due to its clever growth strategies. Heritage Tilray, on the other hand, was a rather small company, which had a market cap of $ 1.1 billion before the merger was announced, but now has a market cap of $ 7.7 billion.

This brought the newly merged company closer to the two leaders in the cannabis industry: the American cannabis company. Curaleaf Holdings, with a market capitalization of $ 9.5 billion, and based in Ontario, Canada Canopy growth, with a market capitalization of $ 9.0 billion.

Since this was a reverse merger, the management of the Aphria Legacy holds the decision-making powers. In fact, Aphria shareholders now own 62% of the new company, with Irwin Simon (CEO and Chairman of Aphria) heading the combined entity. Here are all the ways Tilray can benefit from this merger and why this business is a smart buy in the long run.

Image source: Getty Images.

What’s in this merger deal for Tilray?

Mergers and acquisitions are not uncommon in the marijuana industry. Prior to this merger, Aphria acquired US craft beer maker SweetWater Brewing in November 2020 to enter the US cannabis drink market. Drinks are among cannabis derivatives (vapes, edibles, concentrates, etc.), additional recreational products that Canada legalized in October 2019. Tilray had already entered this category in October with a new line of edibles. infused with cannabis through its owned subsidiary High Park Holdings. By pooling resources and capital, the combined company can launch even more derivatives, competing with peers like Canopy which are growing rapidly in this segment.

In its recent fourth quarter fiscal 2020 results, the former Tilray posted a 20.5% year-over-year jump in revenue to $ 57 million. For the full year, the company recorded a 26% increase in revenue to $ 210 million compared to 2019. Tilray also recorded positive Adjusted EBITDA (earnings before income, taxes, depreciation and depreciation) of $ 2.2 million, compared to a loss of $ 35.3 million. in the period of one year ago. This was Tilray’s first quarter of positive EBITDA before its merger with Aphria – and it’s a good start.

Aphria has generated positive Adjusted EBITDA over the past seven quarters. Now, Aphria’s strong track record and her bus-driving management can make the new Tilray a profitable cannabis business. (EBITDA measures a company’s operational performance, while true profitability is total profit after deducting all deductions.) By merging with Aphria, Tilray has equipped itself to grow and grow.

A firm hand on the wheel

There are some advantages to a bigger business: access to lots of resources, labor and capital. But bigger isn’t always better. A larger business can also be difficult to manage. It could face complications with cost synergies, hidden inefficiencies, merger and personnel costs. This is why Irwin’s leadership is so important: We can expect the company to meet all challenges smoothly.

As CEO, Irwin founded and successfully ran a consumer goods company Heavenly Group of Hain to success before doing the same for Aphria. Aphria has survived and thrived in the midst of a global crisis thanks to the smart growth strategies of Simon and his management team of focusing on their core businesses and strengthening their brands and balance sheet, rather than spending money. random money in acquisitions. It looks like Simon plans to follow the same strategy for the new Tilray – building his existing brands and focusing on his roots in Canada.

On June 8, Tilray launched a new brand of medical cannabis, Symbios, and a high potency medical cannabis topical under the brand Aphria for the Canadian market.

A smart purchase for the long term

The European cannabis market could grow at a compound annual growth rate of 29.6% to reach $ 37 billion by 2027. This could be a lucrative opportunity for Tilray. Simon plans to use Tilray’s facilities in Portugal to help expand into the European market. The company holds a cultivation license from the Government of Portugal to produce medical marijuana products and export them across the continent.

Aphria already has a strong presence in the medical cannabis market not only in Canada and Europe, but also in Africa, South America and Oceania. It generates nearly 97% of its distribution turnover from its German-based subsidiary, CC Pharma.

With the prospect of federal legalization strengthening in the United States, the new Tilray could be a serious competitor in the U.S. cannabis market in five years. In the meantime, European, international and Canadian markets may be its revenue growth engine for the time being. We will learn more about the performance of the new Tilray and its long-term growth strategies when it publishes its next quarterly results. Management expects the operational efficiencies of the merger to generate $ 81 million in annual pre-tax cost reduction synergies within 18 months.

If you are confident in the growth of the marijuana industry, Tilray is a smart buy for the long haul. Two strong companies with an expanded international presence, a strong balance sheet, growing revenues approaching profitability and a good management team are all set to become a cannabis powerhouse. That said, don’t expect any short-term gains, as integrating a merger takes time. So, if you can bear the risks in the short term to enjoy fruitful gains in the future, this cannabis stock is for you.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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