Investors seeking to profit from the merger of Canadian cannabis companies Tilray Inc. and Aphria Inc. are best to do so by buying shares of Aphria, which are trading at a 51% discount over the merger conversion price, Cantor Fitzgerald analyst Pablo Zuanic said Tuesday.
Zuanic reiterated his overweight rating on Aphria stock
APHA,
+5.30%
APHA,
+5.27%
and raised his 12-month price target to C$32.50 ($25.71) from C$26.00. He also stuck with his neutral rating on Tilray
TLRY,
+7.79%,
while raising his price target to $30.25 from $24.20.
“The recent significant bout of volatility in Canadian cannabis stocks may be another deterrent for investors looking at this subsector (aside of mixed fundamentals and valuation),” Zuanic wrote in a note to clients. “But with US MSOs (multi-state operators) landlocked, we continue to think the larger better managed Canadian LPs deserve a premium for global growth potential.”
The planned merger continues to make strategic sense and the combined company could eventually look attractive to consumer packaged goods companies, and could attract a U.S. suitor before the end of cannabis prohibition, he wrote.
Read: Cannabis stocks nosedive as rally driven by hopes for U.S. legal reforms comes to a screeching halt
The combined company will have close to two times the size of Canopy Growth Corp.’s
CGC,
+5.40%
WEED,
+5.36%
share of the Canadian recreational cannabis market, and offers 51% upside for Aphria shares and about 4% for Tilray, he wrote.
Under the terms of the deal, Aphria shareholders will received 0.8381 Tilray shares for each share owned.
“Thus, using TLRY’s closing price of US$29 on 2/12, this would mean APHA
shares would be worth C$31,” said Zuanic. Cantor is not expecting the deal terms to be renegotiated, but rather views the gap as a result of recent volatility in Canadian cannabis stocks with Tilray the most liquid given its Nasdaq listing.
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“We would put the likelihood of other bidders emerging at less than
5% (not for tiny TLRY on its own) and renegotiated terms at less than 20% (we do not think TLRY has much bargaining power),” said the note.
Aphria shares were up 19.5% and have gained 371% in the last 12 months. Tilray’s stock was up 7.3% and has gained 79% in the last 12 months.
The Cannabis ETF
THCX,
+5.09%,
up 2.8%, has gained 99% in the same time frame, while the S&P 500
SPX,
-0.19%
has gained 16%.
For more of MarketWatch’s cannabis coverage, see: Cannabis Watch
