APHA/TLRY confirm their merger
Aphria and Tilray announced their definitive merger agreement, creating a combined entity with an implied pro forma equity value of C$5.0 billion (US$3.9 billion) based on the share price of Aphria and Tilray at the close of the market on December 15, 2020. The combined company plans to add principal offices in the United States, in New York and Seattle, and their Canadian and European offices. The new company will operate under the Tilray corporate name under the ticker ‘TLRY.’
Highlights from the press release were in line with BNN Bloomberg’s source:
- The combined company has pro forma revenues of C$874 million (US$685 million) on an LTM basis, the highest in the global cannabis industry.
- In Canada, the combination of Aphria and Tilray has gross revenues of C$296 million (US$232 million) in the adult-use market on an LTM basis.
- In Canada’s adult-use market, on a pro forma basis from August to October 2020, the combined company would have held a 17.3% retail market share, the largest share held by any single Canadian LP 700bps higher than the next closest competitor.
- The combination of Aphria and Tilray is expected to deliver approximately C$100 million of annual pre-tax cost synergies within 24 months of completing the transaction.
- Aphria CEO Irwin Simon will lead the combined entity. The nine-person board will comprise seven directors from Aphria, including Irwin Simon, and two from Tilray, including Tilray CEO Brendan Kennedy.
- The agreement, structured as a reverse acquisition of Tilray, would give each Aphria shareholder 0.8381 Tilray shares for each Aphria share held, implying that Aphria shareholders would own ~62% of outstanding Tilray shares.
In yesterday’s note, we covered two of our shorts and removed APHA as a Hedgeye Cannabis Best Idea SHORT and TLRY from the Hedgeye Cannabis SHORT Bias List. We are going to wait for the dust to settle on the merger. However, we do not believe diversification is what investors want from a cannabis company as it detracts from the core cannabis business. Furthermore, we have strong reservations about Irwin Simon based on his past management of Hain Celestial. Hain Celestial, the company he built, was merely a roll-up story that he eventually destroyed through cost-cutting, lack of brand investment, and an eventual dry up in the well of small fast-growing companies he could tack on top to maintain top-line growth profile.
Aurora Cannabis scales down operations at Aurora Sky (ACB)
We are removing ACB as a Hedgeye Cannabis Best Idea SHORT.
Just a few weeks after announcing that it was indefinitely halting operations at their Aurora Sun facility in Medicine Hat, Canada, Aurora Cannabis has laid off over 200 positions and reduced production by 75% at its flagship Aurora Sky facility in Edmonton, Canada. The company has spent years and at least C$150 million (US$120 million) in their touted flagship facility.
The company put out a press release commenting on recent business changes: “We are moving to a more variable cost structure in cultivation by expanding our network of external supply and responsibly scaling back production from our fixed asset network. Specifically, in November, we closed our Aurora Sun facility and are now scaling back production at Aurora Sky to 25% of its previous capacity. At this level of production, we intend to transform the Sky facility into a high-value cultivation center for our premium strains, and in turn, better align production with current demand for premium flower."
The company reached an agreement regarding a second amended and restated credit facility with its existing syndicate of lenders, transitioning the facility to a minimum liquidity covenant rather than a minimum EBITDA covenant and extending the maturity to December 31, 2022. Management also announced that it's new “back to basics” regulated consumer packaged goods strategy will delay its achieving positive Adjusted EBITDA.
Additionally, it was separately announced the company’s chief science officer, Jonathan Page, was departing. Page joined through Aurora’s acquisition of Anandia Labs in 2018, and he commented that he decided to leave.
We are also covering our short on ACB. The rising tide driven by market bullishness on the overall cannabis industry lifts all ships.
Verano Holdings IPO pushed to Q1 2021
Verano Holdings announced it has entered into a definitive agreement through a reverse takeover of Majesta Minerals Inc. – a shell company listed on the Canadian Securities Exchange – that would value the company at US$2.8 billion. The transaction is expected to close in the first quarter of 2021 and include the previously announced merger with AltMed. The company expects to raise between $50 million to $100 million from the offering.
The combined entity will establish Verano as one of the three largest MSOs in the United States based on 2021 internal projections compared to current FactSet 2021 consensus estimates for revenue and EBITDA. CEO of Verano, George Archos, commented, “Becoming a public company will give us access to capital to execute our long-term strategy of expanding into limited-license, high-growth markets and scaling both our wholesale and retail operations into new and existing markets. Since the company’s inception, we have been disciplined cannabis operators and prudent stewards of capital with a consistent focus on profitable growth.”
The resulting entity will operate in 14 states with eight cultivation facilities and 48 active retail locations. 24 of those active retail locations are in Florida under AltMed Florida (MüV). Per Crain’s Chicago Business, Verano projects 2020 revenues of $350 - $380 million, putting it behind Curaleaf, Green Thumb, Trulieve, and Cresco Labs pre-merger. Following its merger with AltMed, its internal projections suggest that it will rank with Curaleaf and Green Thumb based on 2021 sales and EBITDA, beating out Trulieve and Cresco Labs.
