Aphria Inc. APHA

Cannabis Canada Weekly: Aphria gets into the beer business

[DaveInCalgary]

Aphria eyes brand awareness as key for U.S. entry with craft brewer deal
 

It was about time Aphria Inc. swung for the fences.

After largely sitting on the sidelines as analysts and investors alike wondered when the Leamington, Ont.-based company would find a way to enter the U.S. market, Aphria announced it would buy a U.S. craft brewer for about US$300 million.

The deal was the result of about 14 months of negotiations between Aphria and Atlanta-based SweetWater Brewing that ultimately led to this week's announcement, said the Aphria chief financial officer Carl Merton.

"We really started the journey on U.S. investment very quickly after [Irwin Simon] was announced as our as our interim CEO [in early 2019]," Merton told BNN Bloomberg in an interview.

"At one point, we had a deal that I thought was really attractive in the tobacco distribution space. We were very interested in that but ultimately decided to back away because we were concerned about the message that it would portray."

SweetWater, however, ticked a lot of boxes for Merton. The company was already generating cash and was profitable - last year the brewer made about US$66 million in revenue and reported $22 million in positive earnings before interest, taxes, depreciation, and amortization (EBITDA) - but would also provide a cult-like customer base who was already predisposed to cannabis through SweetWater's pot-friendly beer brands.

"Our focus on profitability is is very strong and pervades everything we do. So we didn't just blindly jump into diligence. We did a lot of heavy lifting on the deal itself before we started engaging advisors," Merton said.

Analysts have largely reacted positively to the deal. BMO Capital Markets cannabis analyst Tamy Chen said SweetWater appears to be a solid operator but noted that investors will be focused on how effective the brewer will be in advancing Aphria's core cannabis business in the U.S.

That doesn't appear to bother Merton right now. He said brand recognition, especially in the cannabis sector, should take as long as three years to resonate with consumers - plenty of time to get acquainted with the U.S. market and likely the same amount of time needed for cannabis itself to be federally legalized, according to some analysts.

"When you build that relationship with the consumer in advance, you almost pre-seed the market," he said.

However, consumers may not want to hold their breath for Aphria to begin offering cannabis-infused beverages to either the American or Canadian markets.

While that might be a natural course of action after buying an established brewer, the pot drink market has still failed to spark significant sales on either side of the border and Aphria appears willing to wait for the space to play out.

"It's always good to expand your offerings, but you have to do it in a measured way," Merton said. "There's potential, but that potential really cannot be realized until the distribution side of cannabis changes. If you can only buy this at a cannabis store and there's never ever changes, I don't think that beverage market grows."