Cannabis deals in Europe will help giant Aphria build a war chest ahead of an expected frenzy of mergers and acquisitions in the US, MarketWatch president and CEO said before Monday’s group earnings.
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the road to US conquest, supporting the company’s balance sheet and putting it on a firm footing with European regulators, said Irwin Simon.
As in the US, legal recreational cannabis remains on the horizon in Europe, where a combined population of over 500 million in the UK and the European Union makes it a profitable proposition.
Aphria will complete the merger with Tilray TLRY,
this quarter, creating the world’s largest revenue cannabis company. The combined company will travel to the UK, Sweden, Poland, Luxembourg and China, with ongoing talks in India, Aphria said.
The expansion in Europe will take place in a few weeks, at the earliest, when Tilray begins distribution in Luxembourg, with Aphria and Tilray pushing into Poland by the third quarter of this year.
In China, the group will have an agreement to distribute wellness products with CBD – a non-psychoactive chemical from cannabis that is used to treat pain and anxiety, among other conditions. A similar agreement is under development in India.
Aphria is a key player in global cannabis, with a market capitalization of $ 5.1 billion. The group is favored among analysts because it was the first Canadian cannabis company to report a net profit. In December, Aphria agreed to combine with smaller rival Tilray, which has a market capitalization of $ 3.5 billion, by a reverse takeover.
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In exchange for sharing its relatively strong balance sheet with Tilray, Aphria will inherit the company’s presence in 10 European countries, including the United Kingdom, Germany, France, Spain and Portugal, where it has a cultivation unit. Added to Germany’s growing Aphria site and European drug distribution business, the combined group would be the most dominant cannabis player in the region.
As the recreational pot remains illegal in Europe and Asia, cannabis companies can sell their products on the regulated medical market at much higher prices than in the legal recreational markets in the US and Canada. This increases margins, while the nascent industry faces barriers to profits, including price pressure from competing companies and a well-entrenched black market.
European countries have legalized cannabis for medical purposes, and the drug is decriminalized for recreational use in countries such as Italy, Austria, Portugal and the Netherlands. Many, including Simon, consider the legalization of recreational weeds to be a natural issue in much of the region.
“In many ways, Europe is more progressive,” said Simon. “There’s a lot of learning to take away from Europe that we’re finally bringing to the US once legalization takes place here.”
But for now, the drug remains illegal at the federal level in the United States, although individual states, including most recently New York, have legalized it. The national ban has largely kept institutional money out of the sector and an obstacle to interstate business and the pot trade across the US-Canada border. The volatility of the stock market also increased, with a high percentage of shares held by retail investors.
Optimism over federal legalization has grown with the Biden administration, but it remains hypothetical. National decriminalization would be crucial for an American bonanza to start in earnest, but analysts see the Senate’s adoption of the SAFE Banking Act as a cornerstone. The act would allow the cannabis industry to engage in financial services and insurance groups in the US.
Which add: Tilray shares rise after reverse merger agreement with Aphria, to create the world’s largest cannabis company
While some of Aphria’s competitors have sunk their toes into M&A in the US through takeovers that are conditioned by changes in US law, Simon wants to keep Aphria on the sidelines for the time being.
Kristoffer Inton, an analyst at Morningstar, told MarketWatch that US assets with a positive exposure to legalization are attractive to both private equity, alcohol and tobacco, and Canadian cannabis groups. These assets are largely expensive, Inton said, and groups like Aphria must be careful not to overpay in today’s optimistic environment or the expected M&A frenzy to come with legalization. “How will you translate optimism into real exposure without overpaying for assets when everyone wants to?” Inton said.
The most ambitious piece Aphria made in the US was the acquisition of craft beer maker SweetWater in December last year, which gave the company an additional reliable sales channel for alcohol and exposure to cannabis-infused beverages. Consumable derivatives of the drug are widely seen as the future of the industry, and Tilray has a partnership with beverage giant AB InBev BUD,
Finally, analysts point to inflated valuations in the cannabis sector as being rooted in market prices at a certain level of US legalization. Throughout the discussion of enlargement in Europe, Simon acknowledges that America is key to the future of the stock.
His game plan to enter the US market is largely based on building success in Canada and Europe. Simon’s ambitions are to increase the combined market share of Aphria and Tilray in Canada from about 20% to 30%, while remaining positive in cash flow. He also wants to remain the largest medical cannabis company in Europe, including by finding a strong strategic partner in the region and using relations with regulators to obtain licenses in markets that legalize the recreational pot.
If Simon is successful, the company will build a healthy war chest for the upcoming US battle. The SweetWater business is off to a good start, Simon said, and Tilray’s assets include hemp food maker Manitoba Harvest, which is active in the United States. it may not be enough, and Simon knows it could be a costly struggle.
“I will seek to acquire the right [multistate operator] once I know what the market will legalize or how it will legalize the US market, ”Irwin said. “I’d rather pay a little more when I can get into a business where the facts are known.”
Aphria shareholders will receive 0.8381 Tilray shares for each Aphria share they hold when the companies merge, pending shareholder approval in the coming days. The group will operate under the name Tilray with the trading of shares by listing Tilray on the Nasdaq. Simon is to be president and CEO of the combined company, of which Aphria’s shareholders would hold 62%.
To date, Aphria shares have risen by more than 130%, while Tilray shares have risen by more than 140% since the beginning of the year.