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On Friday, Tilray stock traded $2 billion in shares, one of the highest single-day dollar volumes we have ever observed in the cannabis sector. To put things in perspective, the stock currently has a market cap of $2.6 billion based on the shares outstanding. Volumes across all cannabis stocks have exploded in general in this rally, reflecting growing demand ever since the Democrats gained control of the Senate, but 77% turnover in Tilray shares (even higher when considering the float) is rather extreme. Clearly, traders chasing higher prices and not investors are calling the shots in this stock, and we think the traders are making a $800 million mistake.
In December, Tilray agreed to merge with Aphria. While Aphria is acquiring Tilray, Tilray will be the surviving company. Specifically, each share of Aphria will be converted into 0.8381 shares of Tilray. Tilray shot up on the news of the deal on the first day, reflecting the premium it is receiving. On 12/15, the day before the deal was announced, Aphria closed at $8.12, and Tilray closed at $7.87. Since then, Tilray has substantially outperformed Aphria:
At the closing prices of $19.70 for Tilray and $12.42 for Aphria, Aphria is trading at .6305 times the price of Tilray, far below the .8381 exchange ratio. We have been watching the ratio deteriorate steadily since the deal was announced and are shocked. Rather than Aphria trading at a discount to the ratio, it should be trading at a premium in our view, as Tilray is the company being acquired and at most risk if the deal weren’t to close as expected in late Q1 or early Q2.
We reached out in December to Aphria to better understand why the market was placing a premium to the merger transaction, and the company couldn’t explain it. An analyst asked on Aphria’s earnings call this week as well, but there is no clear explanation. We believe that there are some theoretical possibilities that might explain this situation, including another buyer of Tilray stepping in or Aphria being willing to pay more, but both of these seem implausible. The real reason, in our view, is market inefficiency, as it is expensive to short Tilray into the close. We expect that once the traders move on, investors will realize $800 million dollars will have been left on the table.
An owner of Tilray today can sell a share at $19.70 and buy 1.1932 shares of Aphria at $12.42 ($14.82 total cost). At closing, he or she will get back 1 share of Tilray (1.1932 shares times .8381 exchange ratio).
In other words, you can get 32.9% more for your shares effectively by selling today and replacing with Aphria stock than by holding until the closing.
There are 162.4 million shares and in-the-money warrants and options for Tilray. Multiplied by $4.88 per share, this discrepancy is worth $792 million.
Traders could certainly push this relationship even further beyond the irrational levels today, and there are the unlikely events of a higher bid for Tilray from Aphria or another company. Of course, if the merger fails, the sale of Tilray and purchase of Aphria would likely work out even better than expected. To us, this seems like a great way to exploit the exuberance of traders.
KushCo Holdings, a premier provider of ancillary products and services to the legal cannabis and CBD industries, recently reported $26.8 million revenue and positive adjusted EBITDA for the second consecutive quarter in fiscal Q1 2021. The company has shown that doubling down on its efforts to expand its business with leading MSOs and LPs is paying off. KushCo has increased its year-end guidance as the company moves towards achieving its new vision.
Get up to speed by visiting the KushCo Holdings Investor Dashboard that we maintain on their behalf as a client of New Cannabis Ventures. Click the blue Follow Company button in order to stay up to date with their progress.
New Cannabis Ventures publishes curated articles as well as exclusive news. Here is some of the most interesting business content from this week:
- Aphria Cannabis Net Revenue Grows 7% Sequentially to C$68 Million in Fiscal Q2
- AYR Closes Upsized C$158 Million Equity Offering
- Exclusive: California-Based Papa & Barkley Eyes Expansion Plans for Its Solventless Cannabis Products
- Exclusive: Cannabis Retailer Fire & Flower Continues to Leverage Couche-Tard Partnership as It Considers the U.S. Market
- Cresco Labs Sells $125 Million of Stock to 7 Institutional Investors
- Cresco Labs to Enter Florida with $213 Million Bluma Wellness Acquisition
- Curaleaf Finalizes 3-Year Credit Facility at 10.25%
- GrowGeneration Pre-Announces Q4 Above Expectations and Projects 2021 Revenue Will Exceed $335 Million
- GW Pharma Pre-Announces Q4 Revenue of $148 Million Ahead of Expectations
- Hydrobuilder Holdings Raises $70 Million and Combines West Coast Hydroponics Chain with Online Retailer
- Institutional Investors Take Down 80% of TerrAscend C$224 Million Equity Private Placement
- KushCo Holdings Q1 Revenue Advances 1% Sequentially to $26.8 Million
- Exclusive: Michigan Cannabis Sales Surge in December to Reach $985 Million in 2020
- Planet 13 Sells Units at C$7 to Raise C$50 Million
- Village Farms Raises $135 Million Selling Shares at $12.40
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Alan & Joel