Shareholders of Tilray (NASDAQ:TLRY) and Aphria (NASDAQ:APHA) are surely counting down the days until the merger votes both companies will hold in mid-April. By the time we get to the big event, every possible theory about Aphria and TLRY stock will have been passionately discussed by cannabis investors.
At this point, it’s hard to say which is the smarter buy. TLRY stock will be the one that carries on post-merger, so it seems to be the right choice if you believe an Aphria/Tilray tie-up means big cannabis profits for the combined entity over the long haul.
Is there something I’m missing?
Tilray Stock Might Be Overpriced
A quick look at aphriatilraytogether.com explains why Aphria shareholders receive 0.8381 of a Tilray share for every APHA share. Post-merger, Aphria shareholders will own 62% of the 435.23 million Tilray shares outstanding, with Tilray shareholders owning the rest.
If you’re new to investing, you’re probably wondering why Aphria — the bigger company by market capitalization — is doing a reverse merger with Tilray. The major reason is that TLRY stock is thought to be more of a household name than Aphria. I also think the fact that it’s solely traded on Nasdaq is appealing because it reduces the cost of maintaining a dual listing.
When the deal was announced, Aphria was said to be paying a 23% premium or $9.68 a share. Based on 165.39 million shares outstanding, that’s a valuation of $1.6 billion. It’s risen by 138% since. The ETFMG Alternative Harvest ETF (NYSEARCA:MJ) has risen by 49% in the same period.
At Tilray’s current price of $23.10 as I write this, if it were to remain at this level, the combined entity would have a market cap of $10.1 billion or 14.5 times its annual sales of 874 million CAD ($696 million).
Given that Canopy Growth (NASDAQ:CGC) trades at 30.4x sales and Cronos Group (NASDAQ:CRON) at 73.4x sales, a Tilray/Aphria tie-up isn’t valued as ridiculous as some might believe.
In early March, InvestorPlace’s Chris MacDonald suggested that TLRY stock could have a significant downside on the horizon. His rationale was that higher bond yields and inflation are a recipe for disaster for growth stocks like Tilray and Aphria.
One U.S.-based operator MacDonald mentioned was Curaleaf (OTCMKTS:CURLF). Based in the U.S.recreational use cannabis legalization at the federal level would put the multi-state operator at a major advantage. It trades at 14.2x sales.
With operations in 23 states, my colleague’s right to point out that Curaleaf is ideally positioned to benefit from a further loosening of the laws surrounding the recreational use of cannabis.
If you’re looking for a value play, Curaleaf is it.
Aphria Arbitrage
I recently argued that Aphria’s purchase of Sweetwater Brewing would pay dividends for the company. The craft brewer is going to lean hard into cannabis-infused drinks in the future. Aphria CEO Irwin Simon thinks they’ll be as big as the hard seltzer phenomenon experienced in recent years.
I couldn’t agree more.
Assuming a yes vote, Simon will be leading the merged Tilray entity. He’s the right person for the job. I think he has some unfinished business to attend to before he sets off for retirement.
He seems very driven to make Aphria a big success. That’s excellent news if you own either stock, but especially so if you own APHA.
As I write this, APHA is trading at $17.93 while TLRY is $23.10. If you own 1,000 shares of Aphria stock, you’ll get 838 Tilray shares, which are currently worth $19,358. That’s a $1,428 gap. Hence, the arbitrage opportunity.
The Motley Fool contributor Sushree Mohanty recently suggested that investors take advantage of this gap by buying APHA and shorting TLRY at the same time, betting that Tilray’s share price will fall to more accurately reflect the terms of the merger.
The risk is that the deal doesn’t happen and both stocks fall in price, or the entire investing universe jumps on the idea, and the gap disappears due to rising interest in APHA stock.
Unless you’re experienced making long/short bets, I’d stay away from this kind of situation. Instead, I’d focus on the fact that Tilray needs the merger more than Aphria, so you can be sure that Tilray shareholders say yes to the merger vote.
Given the 100 million CAD ($80 million) in synergies expected from the merger, I’m sure Aphria’s shareholders will also vote yes.
The Bottom Line
As I said in the previous section, a surprise no-vote would be more detrimental to Tilray, in my opinion.
Therefore, if you think the combination makes sense long-term, I would buy APHA and wait for the vote to happen. I’d be shocked if it were anything but an overwhelming yes vote by both sides.
I guess we’ll see soon enough.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
