Shareholders of cannabis company Tilray Inc. voted in favour of a proposed merger with rival Aphria Inc. on Friday, in a transaction that will pave the way for the creation of the world’s largest cannabis company by revenue, which will operate under Tilray’s name.
The company will release details of the vote on Monday morning, but a source with knowledge of the meeting confirmed to The Globe and Mail that the merger was approved by shareholders. The Globe is not identifying the source because they are not authorized to speak publicly about the deal.
The combined entity will trade on the Toronto Stock Exchange, and be led by Aphria chief executive Irwin Simon. Tilray CEO Brendan Kennedy will remain on the board of the new company.
Shares of Tilray and Aphria, which have been trading in tandem since the deal was announced last December, both dipped slightly immediately following news of the approved deal. Aphria closed at $18.88 on the TSX, down just 4 cents for the day, but still up more than 90 per cent since December. Tilray’s stock, currently listed on the Nasdaq exchange, closed at US$18.34, down 31 US cents, but up 120 per cent over the past four months.
Aphria’s stock also trades on Nasdaq, but it will be delisted from that exchange on May 3. The deal is expected to close by the end of the second quarter of 2021.
The transaction is effectively a takeover of Tilray by Aphria, with Aphria shareholders receiving 0.8381 of a share of Tilray common stock for each of their Aphria shares. Aphria shareholders will therefore own 62 per cent of the new company, while Tilray stockholders will own the remaining 38 per cent.
Company filings show that when the two CEOs first discussed the deal in February, 2020, it was structured more as a merger of equals, with shareholders of Tilray owning 56 per cent of the combined company and Aphria shareholders owning 44 per cent. Mr. Kennedy would have served as CEO and Mr. Simon as executive chairman. At that point, Tilray was trading much higher than Aphria.
But waning sales and a broader investor sell-off in the Canadian cannabis sector pummelled Tilray’s stock for most of 2020, leaving Aphria in a more competitive bargaining position during negotiations.
Friday’s approval of the merger by Tilray shareholders comes after weeks of uncertainty about whether the transaction would even go through. Tilray initially scheduled a shareholder meeting to vote on the deal on April 16, but delayed it by two weeks, in part because the company had struggled to get the required minimum number of shareholders to attend.
Indeed, company filings indicate this issue was first flagged by Tilray’s proxy solicitation partner, MacKenzie Partners Inc., in an April 8 meeting, citing the number of retail stockholders and a large “dead block” of shares as the main obstacles in achieving quorum.
To circumvent the issue, Tilray’s board, with advice from its lawyers, voted on April 15 to amend the company’s bylaws so just one-third of its shareholders needed to approve the deal, as opposed to a majority of them.
It is still unclear how many shareholder votes resulted in the deal being pushed through. Aphria’s shareholders approved the merger on April 14 with 99.38 per cent of shares represented at the meeting voting in favour of the reverse acquisition.
Aphria is the bigger company in terms of quantity of cannabis produced and revenue generated from cannabis sold domestically. Aphria’s revenue in 2020 was approximately $600-million, while Tilray’s was almost US$200-million.
From Tilray’s perspective, the idea behind combining brands was to leverage Aphria’s scale of production, given that Tilray continues to rely on the wholesale cannabis market for supply. Analysts expect the new company to capture 20 per cent of cannabis demand in Canada.
“It’s a classic industrial strategy for the No. 2 and No. 3 players to merge and contest the No. 1 player for market leadership. That’s what the Aphria Tilray merger is about, in Canada,” said Chris Damas, a cannabis analyst and author of The BCMI Report.
Both companies have incurred massive losses over the years, in part from overpaying for high-end cultivation facilities that ended up being underutilized in the face of a domestic supply glut and lower-than-expected consumer demand. In 2020, Aphria reported a net loss of $585-million, while Tilray’s net loss was approximately $330-million.
Aphria and Tilray have substantial operations in Germany and Portugal, respectively, and will maintain facilities in those two countries. In the U.S., Aphria owns the craft beer company Sweetwater Brewing and plans to launch a CBD-infused beverage line as the country inches toward federal legalization under Democratic President Joe Biden. Tilray owns the Winnipeg-based hemp company Manitoba Harvest, which, to a large extent, made up for Tilray’s weak cannabis sales for most of 2019 and 2020.
By leveraging each other’s assets, the two entities hope to deliver annual pretax cost savings of $100-million within two years of the merger, according to an earlier statement from both companies.
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