If I wanted to make an investment to follow the growing interest in pot stocks, then I’d look to the US public markets. Cannabis stocks are notoriously volatile. Nevertheless, the sector is showing signs of resilience, with M&A activity helping strengthen and merge key players.
Will Tilray become top dog?
Major pot stock Aphria (NASDAQ:APHA) has been given the green light from shareholders to acquire Canadian rival Tilray (NASDAQ:TLRY). This puts the wheels in motion for the world’s largest pot stock by revenue to take shape. Tilray shareholders still have to agree, but it’s looking increasingly likely. If the reverse takeover goes ahead, the new entity will be known as Tilray. But it will be Aphria’s CEO leading the new company and Aphria management will hold seven of the nine board seats.
Aphria is dual-listed on the Toronto Stock Exchange and NASDAQ. Meanwhile, its closest rivals in the Canadian markets are Canopy Growth and Aurora Cannabis.
The medical marijuana sector has been gaining acceptance throughout the US and UK. And now pressure’s rising on Europe to better regulate it too. Hence, the region is gaining global appeal as the next market to expand into.
The Aphria/Tilray merger would put it in a powerful position to make inroads into the European sector. That’s because Aphria already has assets in Germany, while Tilray has a facility in Portugal.
In November, Aphria acquired SweetWater, an American craft beer company for $300m. Meanwhile, Tilray has also begun building a US presence through its acquisition of Manitoba Harvest. These brands should make it easier for the new company to expand throughout the US.
There’s also greater interest in pot stocks with anticipation the Biden administration will decriminalise the sector at the federal level.
Share price volatility continues
Aphria’s share price fell this week after Q3 sales and earnings per share came in lower than expected. This was due to Covid-19-related costs and loss of revenues from physical store closures.
Long-term risks shareholders should consider include the highly competitive landscape and the costs in distribution and running physical stores. A lot will depend on how long it takes for US states to legalise, for decriminalisation to come from the federal level, and how quickly Europe rolls out their medical marijuana regulatory framework. This could all take some time. Then there’s Covid-19, which may continue to cause disruption.
Should I buy Tilray or Aphria stock before the merger?
If I buy 100 Tilray shares today, it will cost me approximately $1,770. And, if I buy 100 Aphria shares today, it will cost me approximately $1,400.
Aphria may seem the obvious choice, as it’s cheaper, but when the companies merge, my Aphria shares will be converted at a rate of 0.8381. This means I would have approximately 83 shares of the new company. Whereas the number of Tilray shares I would own would stay the same. So, it very much depends on the share price at the time of purchase.
As long as the company can continue to make sales and expand, then the growth story could continue to be great for keeping the share price buoyant. But, I’d prefer to wait and see what the new company looks like after the merger goes through before investing.
Kirsteen has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.