Aphria Inc. APHA

NEW CANNABIS : ANALYSIS OF TLRY & APHA MERGER

[Humanist]

Investors in This Cannabis Stock Are Leaving $800 Million on the Table
January 17, 2021 at 10:55 am

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.