Cannabis deals in Europe will help potter Aphria build a war chest ahead of an expected frenzy of mergers and acquisitions in the US, the company’s chairman and CEO told MarketWatch ahead of the group’s earnings on Monday.
High-margin medical cannabis agreements in Europe are critical points on Aphria’s APHA,
APHA,
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Irwin Simon, a way to conquer the US, strengthen the company’s balance sheet and put it on a firm footing with European regulators.
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 lucrative proposal.
Aphria is ready to complete its merger with Tilray TLRY,
this quarter, creating the largest cannabis business in the world by revenue. The combined company will invade the UK, Sweden, Poland, Luxembourg and China while talks are underway in India, Aphria said.
The expansion in Europe will take place in the earliest few weeks, when Tilray will start distributing in Luxembourg, with Aphria and Tilray businesses pushing to Poland by the third quarter of this year.
In China, the group will have a distribution agreement for wellness products with downtown – a non-psychoactive chemical in cannabis that is used, among other things, to treat pain and anxiety. A similar agreement is being developed in India.
Aphria is a major player in global cannabis with a market capitalization of $ 5.1 billion. The group is preferred among analysts because it is the first Canadian cannabis company to report a net profit. In December, Aphria agreed to combine with smaller competitor Tilray, which has a market capitalization of $ 3.5 billion, through 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 ten European countries, including the United Kingdom, Germany, France, Spain and Portugal, where it has a cultivation facility. In addition to Aphria’s growing premises in Germany and the European drug distribution industry, the combined group would be the most dominant cannabis player in the region.
As recreational pot remains illegal in Europe and Asia, cannabis companies can sell their products in the regulated medical market at much higher prices than in legal recreational markets in the US and Canada. This increases margins while the emerging industry faces barriers to profit, including price pressures from competing companies and a well-hedged black market.
Countries in Europe have legalized cannabis for medical purposes, and the drug has been decriminalized for recreational use in countries such as Italy, Austria, Portugal and the Netherlands. Many, including Simon, take the legalization of recreational weeds for granted in much of the region.
“In many ways, Europe is more progressive,” Simon said. “There is a lot of learning to take away from Europe that will eventually bring us to the US once legalization takes place here.”
But for now, the drug remains federally illegal in the U.S., although individual states, including recently New York, have legalized it. Banning at the national level has kept institutional money largely out of the sector and is a roadblock for interstate trade and pot trading that crosses the border between America and Canada. It has also increased volatility in the stock market with a high percentage of stocks owned by retail investors.
Optimism about federal legalization has increased with Biden’s government, but it remains hypothetical. National decriminalization would be crucial to start an American pot bonanza in all seriousness, but analysts view the adoption of the SAFE Banking Act by the Senate as a smaller step. The law will enable the cannabis industry to engage with U.S. financial services and insurance groups.
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While some of Aphria’s competitors have dipped their toes into M&A in the US through takeovers that are conditional on changes to US law, Simon Aphria wants to keep on the sidelines for now.
Kristoffer Inton, an analyst at Morningstar, told MarketWatch that U.S. assets with a positive exposure to legalization are attractive to private equity, alcohol and tobacco, as well as Canadian cannabis groups. These assets are generally expensive, Inton said, and groups like Aphria need to be careful not to overpay in today’s optimistic environment or the M&A madness that is expected to accompany legalization. “How are you going to turn optimism into real exposure without paying too much for assets when everyone else wants it?” Inton said.
The most ambitious play Aphria made in the US was the acquisition of craft brewer SweetWater in December, which gave the company a reliable extra sales channel of alcohol and exposure to cannabis-induced beverages. Consumable derivatives are widely regarded as the future of the industry, and Tilray has partnered with liquor giant AB InBev BUD,
Finally, analysts point to inflated valuations in the marijuana sector as rooted in market prices to some degree of US legalization. Even though there is talk of expanding to Europe, Simon realizes that America is critical to the future of the stock.
His game plan to relinquish the US market is largely based on success in Canada and Europe. Simon’s ambitions are to increase Aphria and Tilray’s combined market share in Canada from around 20% to 30%, while keeping cash flow positive. He also wants to remain the largest medical cannabis company in Europe, including finding a strong strategic partner in the region, and leveraging relationships with regulators to secure licenses in markets that legalize recreational pot.
If Simon is successful, the company will build a healthy war chest for the upcoming battle in the US. The SweetWater venture is off to a good start, Simon said, adding Tilray’s assets include hemp food producer Manitoba Harvest, which is active in the US. But that may not be enough, and Simon knows it can be an expensive battle.
‘I will look into obtaining the right [multistate operator] “Once I know what will legalize the market or how it will legalize the US market,” Irwin said. “I’d rather pay a little more if I could go into a business where the facts are known.”
Aphria shareholders will receive 0.8381 Tilray shares for every Aphria share they own when the companies merge, pending shareholder approval in the coming days. The group will operate under Tilray’s name and trade the shares via Tilray’s listing on the Nasdaq. Simon becomes chairman and CEO of the combined company, of which Aphria shareholders would own 62%.
Aphria’s share has risen more than 130% so far, while shares in Tilray have risen more than 140% since the beginning of the year.