In the latest sign of the cannabis industry's efforts to streamline its operations and take advantage of what they hope will be a promising U.S. market, two of Canada's most prominent pot companies said Wednesday that they plan to merge.
Leamington, Ont.-based Aphria Inc. and Nanaimo-based Tilray Inc. announced they will unite under the Tilray name — a move they say will help them slash costs, control the biggest slice of the Canadian retail market and dominate the burgeoning U.S. cannabis industry.
"This transaction brings together two leading cannabis companies, creating a clear global leader, strengthening our global footprint and positioning the new Tilray for further growth," Tilray chief executive Brendan Kennedy said on a Wednesday call with analysts.
The merger comes during a devastating year for cannabis companies. Many have embarked on dramatic restructurings designed to get spending under control and forge a path to profitability.
The overhauls have seen thousands of Canadian cannabis workers lose their jobs as their employers shut down growing facilities and take multi-billion-dollar writedowns.
Meanwhile, demand for cannabis was high at the outset of the COVID-19 pandemic. Canadians stocked up on pot as many provinces entered lockdowns and stores operated solely through curbside pickup and delivery.
The number of pot stores has been steadily climbing and cannabis companies are eager to own as much of it as they can.
Tilray and Aphria's deal will result in the biggest Canadian cannabis company by revenue because together they will have a pro forma revenue of $874 million.
They will control more than 17 per cent of the retail cannabis market — the largest share held by any Canadian licensed producer.
"My objective … is to get us at least a 30 plus share in Canada, which will get us to become a low cost producer, and will give us a lot of abilities elsewhere around the world," Aphria chief executive Irwin D. Simon said on the analyst call.
He and Kennedy also have their sights on the U.S.
Earlier this year, Arizona, New Jersey, South Dakota, Mississippi and Montana voted in favour of legalizing recreational or medical cannabis through U.S. election ballot questions, which could pave their way for a more national legalization movement.
"There is a high probability that, at some point in the future, with the legalization of medical cannabis in the U.S., there is an opportunity for medical cannabis to be imported into the U.S. either from Canada or from Europe just like we see in virtually every other country," said Kennedy.
When legalization arrives the company will likely decide "to buy something or create something in the U.S. market," Simon added.
Until legalization, they will focus on opportunities in the U.S.'s consumer packaged goods sector for Tilray's hemp food company Manitoba Hemp and Aphria's recently-acquired beverages firm SweetWater.
Though Simon and Kennedy were both excited to announce their plans for the company Wednesday, their roles will see some changes.
Under the agreement, Simon will lead the combined company, while Tilray's Kennedy will sit on the new company's nine-person board, alongside seven others from Aphria and one more person from Tilray.
The new Tilray will trade on the Nasdaq under the ticker symbol TLRY and will maintain offices in New York and Seattle, in addition to Toronto, Leamington, Vancouver Island, Portugal and Germany.
Aphria will receive 0.8381 shares of Tilray for each Aphria common share, while Tilray's shareholders will see no adjustment to their holdings.
Once the deal is complete, Aphria's shareholders will own about 62 per cent of the outstanding Tilray shares on a fully diluted basis.
The boards of directors of both companies have unanimously approved the deal, which is expected to be completed in the second quarter of 2021.
Asked if the deal will involve future layoffs, Aphria said in an email to The Canadian Press that "for now (and into the foreseeable future), it is business as usual in all respects."
"Until the business combination is complete, Aphria and Tilray will remain separate companies and we remain committed to ensuring that we have the requisite skills and talent necessary at all levels to achieve our corporate objectives," the company wrote.
However, Simon said the deal will unlock at least $100 million of annual pre-tax cost synergies within two years of closing.
"With the Canadian licensed producers, to find $100 million in synergies and savings is pretty difficult," Simon said.
Simon and Kennedy believe they will uncover synergies and savings in cultivation and production, cannabis and product purchasing and sales, marketing and corporate expenses.
Aphria’s Leamington operations will be able to provide additional supply for Tilray’s brands and replace the need for Tilray to use wholesale cannabis purchases from other licensed producers, they said.
Meanwhile, Tilray’s London, Ont. facility will provide Aphria with excess capacity to increase production of items like edibles and beverages.
The pair are also considering using Tilray’s existing Nanaimo facility to help Aphria’s Broken Coast brand meet increasing consumer demand.
This report by The Canadian Press was first published Dec. 16, 2020.
Companies in this story: (TSX:APHA)
Tara Deschamps, The Canadian Press