The New Tilray: Is Size Really What Still Matters In The Cannabis Sector?
Brenda O'Farrell | Dec 22, 2020 05:03
The latest big headline from the cannabis sector as 2020 comes to an end could very well set the scene for industry expansion in 2021.
The news is the blockbuster $5-billion merger between Tilray (NASDAQ:TLRY) and Aphria (NASDAQ:APHA), (TSX:APHA) announced last week.
The two Canadian-based marijuana giants will come together under Tilray's name in 2021. The new company will aim to consolidate its stake in Canada, strengthen its position in Europe and set up for a major push into the U.S. market as the country’s path to federal legalization of pot accelerates with the new Biden administration about to take office next month.
The merger is expected to close by the second quarter of 2021. When it does, it will claim the title of the world’s largest marijuana company, surpassing Canopy Growth (NASDAQ:CGC), (TSX:WEED). By revenues alone, the new company will have revenues estimated at about $875 million, far outpacing Canopy’s of $477 million.
The new Tilray will also lay claim to about 17% of the Canadian weed market, a stake it plans to double within the coming years. And the merged company is cash-rich and will be able to boast being one of the most cost-effective producers in the industry, two features that put it in good standing to move quickly into the coveted U.S. market.
But the question remains: Can two businesses that have steadily lost money come together and in the process be transformed into a viable profitable powerhouse?
The road ahead is not without its challenges. Both Tilray and Aphria separately have struggled with overexpansion that led to substantial write-offs, a list of operational miscues and the timeline for wide-scale expansion into the U.S., although likely, still cannot be clearly outlined.
Investors are encouraged, but seemingly not overexcited and perhaps willing to take a wait-and-see approach.
Shares of Tilray gained sharply on the announcement of the merger on Dec. 16, appreciating almost 25% to hit $9.86. But since then the stock has steadily pulled back. Yesterday, it closed at $8.39, down another 5.6% on the day, but still above the pre-merger level.
Aphria shares also gained on the merger news last Wednesday, hitting a high of $8.45, but have since lost ground. They closed Monday at $7.21, a 14.6% slide, but still well above where they were at about this time last year.
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One lesson that investors in the cannabis sector have learned, however, is that size is not everything.
Even when it was the biggest grower on the planet, Canopy Growth began to downsize, pulling back the scope of its operations to better position itself for the future. And in that respect, it might very well be a step ahead of the new Tilray.
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