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Why this cannabis giant says Europe is key to US legalization frenzy

 


The cannabis deals in Europe will help pot giant Aphria build up a war chest ahead of an expected frenzy of mergers and acquisitions in the United States, the company’s president and CEO told Barrons on Monday before the group results.

High-margin medical cannabis deals in Europe represent critical crossing points on Aphrias’ road to conquer the United States, strengthening the company’s balance sheet and putting it on solid footing with European regulators, said Irwin Simon.

As in the United States, legal recreational cannabis remains on the horizon in Europe, where a combined population of over 500 million in the United Kingdom and the European Union makes it a lucrative proposition.

Aphria is close to completing its merger with Tilray this quarter, creating the world’s largest cannabis company by revenue. The merged company will penetrate the UK, Sweden, Poland, Luxembourg and China, with deal talks underway in India, Aphria said.

The expansion in Europe will take place in a few weeks at the earliest, when Tilray starts distributing in Luxembourg, with the companies Aphria and Tilray setting up in Poland in the third quarter of this year.

In China, the group will have a wellness product distribution deal with CBD, a non-psychoactive chemical in cannabis, used to treat pain and anxiety, among others. A similar agreement is under development in India.

Aphria is a key player in global cannabis with a market capitalization of $ 5.1 billion. The group is preferred among analysts for being the first Canadian cannabis company to report net profit. In December, Aphria agreed to team up with smaller rival Tilray, which has a market cap of $ 3.5 billion, through a reverse takeover.

Read: Aphria and Tilray combine in major marijuana merger. What this means for jar stocks.

In return for sharing its comparatively strong balance sheet with Tilray, Aphria would inherit the company’s presence in 10 European countries, including the UK, Germany, France, Spain and Portugal, where it has ‘a cultivation facility. Added to Aphrias’ growth site in Germany and drug distribution activities in Europe, the combined group would be the most dominant cannabis player in the region.

Since recreational cannabis remains illegal in Europe and Asia, cannabis companies are able to sell their products in the regulated medical market for much higher prices than in legal recreational markets in the United States and Canada. This increases margins as the nascent industry faces barriers to profits, including price pressure from competing companies and a entrenched black market.

Countries in Europe have legalized cannabis for medical purposes, and the drug is decriminalized for recreational purposes in countries such as Italy, Austria, Portugal and the Netherlands. Many, including Simon, take the legalization of recreational weed for granted in much of the region.

In many ways, Europe is more progressive, said Simon. There is a lot of learning to be taken from Europe that we ultimately bring to the United States once legalization takes place here.

But for now, the drug remains federally illegal in the United States, although individual states, including most recently New York, have legalized it. The nationwide ban has largely driven institutional money away from the sector and is a roadblock for interstate businesses and the pot trade crossing the Canada-U.S. Border. It also increased stock market volatility with a high percentage of stocks held by retail investors.

Optimism over federal legalization has increased with the Biden administration, but remains speculative. National decriminalization would be crucial for an American windfall to truly begin, but analysts see the passage of the SAFE Banking Act by the Senate as a small springboard. The law would allow the cannabis industry to engage with U.S. financial services and insurance groups.

In addition: an internal bill would allow the US cannabis industry access to banks, but not to share lists

While some of Aphrias’ competitors have embarked on mergers and acquisitions in the United States through buyouts conditional on changes in U.S. law, Simon wants to keep Aphria on the sidelines for now.

Morningstar analyst Kristoffer Inton told Barrons that US assets positively exposed to legalization are attractive to private equity, alcohol and tobacco, as well as to Canadian cannabis groups. These assets are expensive overall, Inton said, and groups like Aphria must be careful not to overpay in today’s optimistic environment or in the mergers and acquisitions frenzy that should come with legalization. . How are you going to translate optimism into real exposure without overpaying for assets when everyone else wants it? Said Inton.

Aphria’s most ambitious play in the United States was its acquisition of craft brewer SweetWater last December, which gave the company a reliable additional sales channel for alcohol and exposure to cannabis-infused beverages. . Consumable derivatives of the drug are widely seen as the future of the industry, and Tilray has a partnership with beverage giant AB InBev.

Ultimately, analysts indicate that inflated valuations in the cannabis industry are rooted in market prices with some level of US legalization. Despite all the talk about expansion in Europe, Simon recognizes that America is essential to the future of the stock.

His game plan for entering the US market hinges in large part on successes in Canada and Europe. Simons’ ambitions are to increase the combined market share of Aphria and Tilrays in Canada from around 20% to 30% while maintaining positive cash flow. It also wants to remain the largest medical cannabis company in Europe, including finding a strong strategic partner in the region, and leveraging relationships with regulators to obtain licenses in markets that legalize recreational cannabis.

If Simon is successful, the business will be a healthy war chest for the coming battle in the United States. The SweetWater business is a good start, Simon said, and Tilrays assets include hemp grower Manitoba Harvest, which is active in the United States. may not be enough, and Simon knows it could be an expensive fight.

I will seek to acquire the right [multistate operator] once I know what the market will legalize or how the market will be legalized in the United States, Irwin said. I prefer to pay a little more when I can get started in a business where the facts are known.

Aphria shareholders will receive 0.8381 Tilray share for each Aphria share they hold on the company merger, pending shareholder approval in the coming days. The group would operate under the name Tilrays, with the shares trading through the listing of Tilrays on the Nasdaq. Simon will be chairman and chief executive officer of the combined company, of which Aphria shareholders would hold 62%.

Aphria stock is up more than 130% so far, while shares of Tilray have jumped more than 140% since the start of the year.

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