After what’s arguably the biggest announcement of the year for the cannabis investment market, a group of experts gathered to discuss the impact of the latest big-name merger in the space.
On Tuesday (December 16), the cannabis market received a jolt from the merger deal between Aphria (NASDAQ:APHA,TSX:APHA) and Tilray (NASDAQ:TLRY). During an online panel discussion that same day, Steve Hawkins, president and CEO of Horizons ETFs Management (Canada), and Som Seif, founder and CEO of Purpose Financial, welcomed the deal with open arms.
“We’ve been looking for consolidation,” Hawkins noted. “This is not a surprising reaction … it’s something that I think is really, really good for this industry as it now matures.”
The panel, which was hosted by the NEO Exchange, also included Vivien Azer, managing director at Cowen (NASDAQ:COWN), and Erik Sloane, the NEO’s chief revenue officer.
“(Tuesday’s) announcement is something that we’ve been suggesting for some time, (something) I think the industry needs and has been looking for, which is consolidation amongst the many operators that do sit in Canada,” Seif told the online audience.
The theme of consolidation was widely expected to dominate the cannabis market in 2020.
The Purpose Financial leader added that he expects this deal to be the spark that lights the fire of more transactions. “I think this is a great starting point,” he said.
Hawkins ran through the arduous timeline for Canadian producers after the market reached significant highs early on based on big expectations for the industry.
“Valuations were significantly overinflated … the market sales in Canada were C$2 billion previously when the market capital of all the Canadian cannabis companies was over US$50 billion,” he said.
The Horizons executive went as far as to call those numbers “crazy” in terms of the value they give to Canadian corporations.
Horizons oversees the Horizons Marijuana Life Sciences Index ETF (TSX:HMMJ) and the Horizons US Marijuana Index ETF (NEO:HMUS), while for its part Purpose Financial manages the Purpose Marijuana Opportunities Fund (NEO:MJJ).
What will the new Tilray look like?
The merger between the two companies is expected to result in nearly C$900 million of pro forma revenue for 2020. According to the two cannabis producers, the resulting company will hold a valuation of C$5 billion, making it one of the biggest cannabis stocks in the public market.
Once the transaction is complete, the new Tilray will incorporate Aphria’s assets and staff while retaining its name and stock symbol. However, Brendan Kennedy, the current CEO of Tilray, will not lead the new firm. Aphria CEO Irwin Simon will take care of those duties and Kennedy will remain as a board member.
“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,” Kennedy said in a statement to investors.
As part of the deal, every Aphria shareholder will obtain 0.8381 of a Tilray share for every Aphria share they hold. Shareholders of Tilray will not see their holdings change with this transaction.
Aphria will appoint seven of the new board’s nine total members when they are announced.
In reaction to the announcement, shares of Tilray jumped by double digits. While the company has had a difficult performing year in the market, Tuesday’s news helped change the story.
Tilray closed the day at a price of US$9.33, representing an 18.55 percent uptick. Meanwhile, shares of Aphria in Toronto finished the day with a marginal loss of 0.09 percent at a price of C$10.31.
The realities of the cannabis market are putting producers in the increasingly complicated position of evaluating more cuts or contemplating transactions to improve their positions.
It’s clear though that for the experts these deals are a good thing in the long run for investors.
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Securities Disclosure: I, Bryan Mc Govern, hold no direct investment interest in any company mentioned in this article.
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