Canadian cannabis company Tilray (NASDAQ:TLRY) announced on Aug. 17 that it and other investors acquired 75% of MedMen Enterprises’ (OTCMKTS:MMNFF) outstanding secured convertible notes and 65% of its outstanding warrants for $165.8 million. TLRY stock gained 5% on the news.
However, if converted to equity, the notes and warrants would give Tilray a 21% stake in the California cannabis retailer.
That’s the good news. The bad news is that it might not issue the stock necessary to pay for its investment.
“The Robinhood crowd, coupled with the Reddit Rebellion, has made day-trading both profitable and fashionable again, with very little attention paid to the history of speculative episodes like these,” Insana wrote on July 31. “This is not the first time that the little guy has seen the playing field leveled on Wall Street, and it won’t be the last.”
Insana completed his commentary by stating, “Nothing is free, and nothing lasts forever.”
In the meantime, retail investors are wreaking havoc with companies, big and small.
In Tilray’s case, it has had to postpone a special vote by shareholders on two occasions — the first was July 30; the second was Aug. 19 — to approve the increase in the authorized number of shares outstanding and some governance-related enhancements to stockholder rights.
Unfortunately, it’s been unable to get enough shareholders to vote to approve a simple move like increasing its authorized share count. So while it intends to pay for its investment by issuing nine million shares at $13 a share, if it can’t get approval from shareholders by Dec. 1, it will pay for the convertible notes in cash.
Social Media and TLRY Stock
“Tilray’s attempt to get the vote passed is also coming up against pushback on social media; sentiment on platforms such as Twitter and Reddit can be instrumental in swaying the average retail investor,” reports The Globe and Mail.
“A Twitter account run by Robert Doxtator, a frequent cannabis commentator who operates under the pseudonym BettingBruiser, has repeatedly urged investors not to vote in favor of the proposal, arguing that share dilution would not be in the interest of Tilray investors.”
Part of Tilray’s problem is that it has a substantial retail investor base. However, what’s weird is that the company is having a tough time getting these investors to the table.
As The Globe and Mail reported, Stifel Financial analyst Andrew Carter believes the shareholder vote will happen and be approved by shareholders but not before wasting significant company time and resources.
Tilray Looks for a Pathway
Anyone who follows the Canadian cannabis scene knows that all major players are jockeying for a position should the U.S. legalize cannabis at the federal level.
“If MedMen is successful in its turnaround, then Tilray would have acquired its stake for a reasonable price,” said Bank of Montreal analyst Tamy Chen according to The Globe and Mail. “But if MedMen is unsuccessful, Tilray can walk away, but it would lose this U.S. pathway.”
There’s no question Tilray CEO Irwin Simon will continue to explore other avenues into the U.S. market before federal legalization that will lower its cost of entry. However, once federal legalization gets the green light, the valuation of U.S. multi-state operators goes way up.
I think it’s a smart move and I don’t believe it’s his last. One way or another, Tilray will have to open its purse strings if it wants to obtain a good seat at the table. You can be diluted now, or you can be diluted later. But you will be diluted at some point.
To delay a vote for six weeks merely because retail investors don’t have the same sophistication when it comes to proxy voting, etc., really hurts retail investors only. The institutions make countless bets. Tilray is one small one. So they can patiently wait for an outcome.
Whenever this happens, you don’t have to worry about the institutional money being ready.
The Bottom Line
In early August, I suggested that institutional investors need to step up for TLRY stock to get out of the teens. I think they will.
Until then, retail investors are wreaking havoc with what should be a relatively straightforward procedure. Tilray will continue to pay the consequences. As I said, that hurts retail investors far more than the big institutional money.
Long-term, however, I still like TLRY stock under $20 for aggressive investors.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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.