• April 12, 2024

Why this cannabis giant is betting on Europe to build a war chest ahead of the U.S. legalization bonanza

Cannabis deals in Europe will help pot giant Aphria build a war chest before mergers and acquisitions are expected in the US, the company’s chairman and chief executive told MarketWatch on Monday ahead of the company’s earnings.

High margin medical cannabis deals in Europe are important waypoints for Aphria
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Irwin Simon said the way to conquer the US is to strengthen the company’s bottom line and put it on solid footing with European regulators.

As in the US, legal recreational cannabis remains on the horizon in Europe, where a total population of more than 500 million in the UK and the European Union make this a lucrative proposition.

Aphria will complete the merger with Tilray
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The world’s top-selling cannabis company by revenue was launched in the quarter. The combined company will penetrate the UK, Sweden, Poland, Luxembourg and China, with contract discussions ongoing in India, Aphria said.

The expansion in Europe will take place in a few weeks at the earliest, when Tilray begins distribution in Luxembourg and the Aphria and Tilray businesses penetrate to Poland by the third quarter of this year.

In China, the group will enter into a distribution agreement for wellness products containing CBD – a non-psychoactive chemical found in cannabis that is used, among other things, to treat pain and anxiety. A similar agreement is under development in India.

Aphria is a major player in global cannabis with a market cap of $ 5.1 billion. The group is preferred by analysts as the first Canadian cannabis company to post a net profit. In December, Aphria agreed to partner with smaller rival Tilray, which has a market cap of $ 3.5 billion, in a reverse acquisition.

Also read: Canopy Growth is not buying Acreage Holdings, it is buying the right to buy Acreage Holdings

In return for sharing the comparatively strong balance sheet with Tilray, Aphria would inherit the company’s presence in 10 European countries including the UK, Germany, France, Spain and Portugal, where it has a cultivation facility. Along with Aphria’s growing location in Germany and the European drug distribution business, the combined group would be the most dominant cannabis player in the region.

With recreational pots still illegal in Europe and Asia, cannabis companies can sell their products in the regulated medical market at far higher prices than in legal recreational markets in the US and Canada. This increases margins while the emerging industry faces profit barriers, including price pressures from competing companies and a well-anchored black market.

Countries in Europe have legalized cannabis for medicinal purposes, and the drug has been decriminalized for recreational use in countries like Italy, Austria, Portugal and the Netherlands. Many, including Simon, take recreational herb legalization for granted in much of the region.

“Europe is more progressive in many ways,” said Simon. “There is a lot to learn to take away from Europe that we will ultimately bring to the US once legalization takes place here.”

However, the drug is currently illegal nationwide in the United States, although individual states, most recently New York, have legalized it. The national-level ban has largely kept institutional money out of the sector and is a barrier to international business and pot trading across the US-Canada border. It has also increased volatility in the stock markets with a high percentage of stocks held by retail investors.

Optimism about federal legalization has increased with the Biden government, but remains a hypothesis. National decriminalization would be critical for a U.S. pot bonanza to begin in earnest, but analysts view the Senate’s passage of the SAFE Banking Act as a smaller stepping stone. The bill would allow the cannabis industry to deal with U.S. financial services and insurance groups.

Plus: Tilray stock rises after reverse merger deal with Aphria to create the largest global cannabis company

While some of Aphria’s competitors have dipped their toes in M&A in the US Acquisitions Subject to Changes in US LawSimon wants to keep Aphria on the sidelines for the time being.

Kristoffer Inton, an analyst at Morningstar, told MarketWatch that US assets with positive legalization risk are attractive to private equity, alcohol and tobacco companies as well as Canadian cannabis groups. Those assets are by and large expensive, Inton said, and groups like Aphria need to be careful not to overpay in today’s bullish environment or the M&A frenzy that comes with legalization. “How can you turn optimism into actual exposure without overpaying for assets when everyone else so wishes?” Said Inton.

The most ambitious game Aphria made in the US was the acquisition of the craft brewer SweetWater last December, which gave the company a reliable additional distribution channel for alcohol and exposure to cannabis-infused beverages. Consumable derivatives of the drug are widely viewed as the future of the industry, and Tilray has a partnership with beverage giant AB InBev
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Ultimately, analysts point to inflated ratings across the cannabis sector based on market prices in some degree of US legalization. For all talk of expanding into Europe, Simon recognizes that America is vital to the future of the stock.

His plan to dive into the US market is largely based on building on successes in Canada and Europe. Simon’s ambitions are to increase the combined market share of Aphria and Tilray in Canada from around 20% to 30% while maintaining positive cash flow. He also wants to remain the largest medical cannabis company in Europe, including by finding a strong strategic partner in the region and leveraging relationships with regulators to secure licenses in markets that legalize the recreational pot.

If Simon is successful, the company will build a healthy war chest for the upcoming battle in the US. The SweetWater business is a good start, Simon said, and Tilray’s net worth includes US-based hemp food producer Manitoba Harvest, which can’t be enough, and Simon knows it could be an expensive fight.

“I’ll try to get the right [multistate operator] As soon as I know what the market is going to legalize or how the market is going to legalize in the US, ”said Irwin. “I’d rather have to pay a little more if I can get into a business where the facts are known.”

Aphria shareholders will receive 0.8381 Tilray shares for each Aphria share they own upon the merger, pending shareholder approval in the coming days. The group would operate under the Tilray name and trade its shares through Tilray’s listing on the Nasdaq. Simon is said to be chairman and chief executive officer of the combined company, in which Aphria shareholders would hold 62%.

Aphria stock is up more than 130% to date, while Tilray’s stock is up more than 140% since the start of the year.

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