Chairman and CEO Irwin D. Simon sent a shareholder letter mapping out his $4 Billion revenue plan. The CEO is mapping out a classic roll-up strategy that many want to claim he did successfully in the natural and organic space at HAIN. The CEO listed five key competitive differentiators, which are nothing more than the TLRY PR team coming up with an investment thesis for a poorly capitalized Canadian Cannabis company. When looking at any roll-up, some classic acquisition criteria are important when it comes to looking at potential M&A targets. The problem is that few of these apply to TLRY in the Cannabis space. They are:
- Strong cash flow characteristics
- Category leading positions in niche markets
- Products that generate recurring revenue
- Attractive historical margins and margin expansion opportunities
- Accretive to earnings (an accounting trick can make things look better than reality)
When CPG companies look to acquire brands, they are looking for brands with strong brand awareness and entrenched wholesale relationships. Unfortunately, this does not exist in cannabis and must be found elsewhere, thus why it has his focus on a CPG business. At HAIN, the corporate stories about the companies acquired were about cutting the low-hanging fruit to extract economies of scale from the combination. This led to a company with many brands, but none that had scale and market share leadership. There was also a complete void of investment into build the acquired brands. In the end, the HAIN model was far from perfect and ultimately blew up. Part of the HAIN strategy was acquiring multiple brands; you could gain more favorable placement/economics at the large big-box retailers. Unfortunately, these acquired brands had significant bloat and market nuances that were sometimes difficult to remove. Ultimately, many acquisitions failed, as newer, digital-first brands were already disrupting the market, making organic growth non-existent. This was exacerbated by how deals are sourced. There is typically a lengthy and expensive due diligence with bankers and lawyers, which can take months to close, and speed is crucial in consumer brands where trends can change quickly. So what TLRY is up to its nothing but HAIN 2.0, with lots of baggage built-in:
TLRY - The industry’s broadest geographic footprint and operational scale. Tilray now possesses the geographic footprint and operational scale to emerge as a consolidator in the global cannabis market.
Hedgeye: Yet the company lacks an operational footprint in the most significant market globally, the U.S. The CEO is making a desperate pitch to get shareholders to increase the share count by 250 million to issue shares for an aggressive M&A strategy. At current prices, that would give the company over $3 billion. If $110 million only get you 20% of a nearly bankrupt, marginal player in the cannabis industry, he will need all of the $3 Billion to become a major player in the U.S., and that still might not be enough.
TLRY - Leadership position in Canada, with a complete portfolio of product offerings and carefully curated brands. Plan to grow and strengthen our position as the #1 Canadian L.P. in total sales consolidated. This is the foundation that will be so essential to getting Tilray from their current combined retail market share in Canada of 16% to our goal of 30% share by the fiscal year 2024
Hedgeye: The company margins on its Cannabis business in Canada are low, and given the country's tax structure, it will likely never generate acceptable margins in Canada.
TLRY - Tremendous international growth opportunities from a strong base. The European Union, where Tilray already has a significant presence, represents a strong growth market and could be a $1 billion business for medical use alone. They will also be ready for adult-use legalization when the time comes.
Hedgeye: This is nothing but a distraction. The company will need to put all of its available capital and resources into the US business to succeed. What amount of capital is needed to compete on the international stage? More than the company has.
TLRY - A leading U.S. CPG platform to be immediately leveraged for cannabis products upon federal legalization. In the U.S., they already have a strong consumer packaged goods presence and infrastructure with two strategic pillars, SweetWater, the 11th largest craft brewer in the nation and leading lifestyle brand, and Manitoba Harvest, a pioneer in branded hemp, CBD and wellness products, with access to 17,000 stores in North America. Together, they are already $100-plus million businesses and quite profitable – but still have enormous potential.
Hedgeye: A leading CPG platform with $100 million in revenues? Huh?
TLRY - Accretive acquisitions and other growth opportunities. The investment Tilray recently made in the outstanding senior secured convertible notes of MedMen is a critical step towards delivering on their objective as they work to enable Tilray to lead the U.S. market when legalization allows.
Hedgeye: Put TLRY is an under-capitalized low-margin inefficient Canadian Cannabis company. It does not have a leading CPG platform in the U.S.; to say anything different is not realistic about its opportunities.
