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Home / News / World /  Tilray and Aphria announce merger to create the largest global cannabis company

Tilray Inc. and Aphria Inc. have agreed to an all-stock merger, which would create the world's largest cannabis company by sales. The merger will result in a company holding a whopping 17% share of the Canadian cannabis market and is a strategic move that will likely provide each company security about their future in a post-pandemic world. The combined company is reported to have an implied pro forma equity value of $3.9 bn.

The merger would reassert Tilray and Aphria's dominance in the Canadian cannabis market. However, the companies are not just stopping there as they hold plans to enter the potentially massive US market. They have a head start too. While Tilray is headquartered in Canada, it is registered as a US firm. Further, in July 2018, Tilray became the first cannabis company to debut on a major US stock exchange. Additionally, Aphria announced last month that it would be acquiring SweetWater Brewing Company, one of the largest independent craft brewers in the US. This would provide an important distribution point south of the Candian border. Tilray also has a partnership with beer brewer AB InBev. This would put the combined company at the spearhead of the cannabis-infused drinks market.

The combined company is set to operate under the name 'Tilray' and trade under Tilray's ticker, 'TLRY' on the Nasdaq index. As per the terms of the transaction, which was characterised as a reverse acquisition, Aphria's shareholders will own 62% of Tilray's stocks. Aphria, the bigger of the two companies, will pay a 23% premium to Tilray's December 15 closing price of $7.87.

This merger makes sense for each company individually as Aphria is provided better access to the US and Europe through Tilray's offerings. At the same time, Tilray gets help improving its balance sheet after agreeing last month to convert $124.3 million of senior notes plus accrued interest into 10.9 million shares of its Class 2 common stock.

Investors seem to be excited at the prospect of two of the biggest players in the cannabis industry merging as Tilray and Aphria's stocks ballooned by 27% and 6%, respectively, as the merger was announced. This optimism reflects the US inching closer towards becoming the largest cannabis market with public sentiment for the legalisation of cannabis growing. It was only last month when residents in South Dakota, New Jersey, Montana, and Arizona voted in favour of legalised recreational marijuana while medicinal marijuana measures passed in Mississippi and South Dakota. The enactment of the bill is still pending. It is noteworthy that Illinois collected $22.8 million in taxes related to cannabis sales in October, only $2.86 million lesser than what was collected from alcohol sales taxes.

Further, the election of a more cannabis-friendly president-elect might be a contributing factor. However, investors should be aware that a Republican-controlled US Senate is not likely to sign off on the full legalisation of cannabis. It should also be noted that President-elect Joe Biden's current proposal to decriminalise marijuana at the federal level is not the same as legalising the drug.

Cannabis also had a victory in the US Congress earlier this month as the US House of Representatives passed a bill, the Marijuana Opportunity Reinvestment and Expungement Act, to de-schedule and end the federal prohibition of cannabis, which if put into law would be a watershed moment for the multi-billion dollar cannabis industry. The bill now has to be considered by the US Senate in the present session of Congress. If the bill does not sign into law before Congress adjourns on January 3, 2021, the bill will have to be reintroduced. This is most likely what is to happen. Regardless, the bill is likely to be dead on arrival in a Senate still controlled by Mitch McConnell, who has indicated that he has no plans to vote on the legalisation of cannabis. However, this is certainly a first step on the road to legalising cannabis, heralding a sanguine future for the cannabis industry.

While the US remains the merger's biggest potential prize, the combined company is also primed to have a strong European presence with an end-to-end supply chain and distribution. This includes Aphria's medical cannabis distribution subsidiary in Germany and Tilray's 2.7 million square foot cannabis cultivation and production facility in Portugal, which provides tariff-free access to the European Union.

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