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To profit from planned merger of Tilray and Aphria, buy Aphria, says this analyst

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.”

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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.

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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.

Read now: Cannabis stocks rally after Chuck Schumer leads drive for reforms that may end federal prohibition

“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

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