Buy Aphria Stock
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Arbitrage usually involves taking advantage of a price difference of a given stock (or other investment) between multiple markets. But every now and then, an opportunity for a different kind of arbitrage arises. That's what's happened with the merger of Aphria and Tilray.
More important for potentially buying Aphria stock, though, are the specific terms of the merger. Aphria shareholders will receive 0.8381 shares of Tilray for each of their Aphria shares. Tilray shareholders will keep the current shares.
Currently, Aphria is trading at close to 0.73 times Tilray's share price. The single most compelling reason to buy Aphria stock right now is that this ratio absolutely must increase to the 0.8381 ratio included in the merger agreement.
But just buying Aphria stock by itself isn't enough to effectively capitalize on the merger arbitrage opportunity. There are three ways that the ratio between Aphria's and Tilray's share prices could get to the agreement ratio:
I'll readily admit that Aphria could deliver solid returns for investors even after the arbitrage opportunity goes away. However, I think there are other cannabis stocks that are even better picks for investors right now.
Mergers and acquisitions (M&A) are always exciting news. But the temperature has really been dialed up on the upcoming mega-merger between two big Canadian cannabis players, Aphria (APHA) and Tilray (TLRY). Since marijuana sales have skyrocketed amid the pandemic, the sector is the talk of the town. The expectation surrounding the new entity captured investors' attention even more, elevating the stock prices of both Aphria and Tilray this year. So far in 2021, Tilray's stock has gained 227%, while Aphria has surged 180%. The industry benchmark, the Horizons Marijuana Life Sciences ETF, has gained 63% over the same time frame.
Currently, investors are keen to cash in on the Aphria-Tilray merger arbitrage opportunity. A merger arbitrage occurs when the stock price of the target company trades below the proposed acquisition price, mostly because of uncertainty around whether the deal will succeed or fall through. This price difference allows investors to buy the stock of the target company at a discount and make profits when the merger is completed.
Currently, Tilray's shares are trading higher than Aphria's. So, buying Aphria now and shorting Tilray is a good short-term bet for making a profit when the merger completes. Shorting Tilray shares allows investors to borrow and sell the stock now, and then buy the stock later to return it to the lender. In this way, the investor is essentially betting that the stock price will sink, allowing them to make a profit from the difference between the buying price and the selling price.
Cannabis is an evolving, quickly growing industry. The global cannabis market is expected to grow at a compound annual growth rate (CAGR) of around 17.8% to be worth $65.1 billion by 2027. Knowing this, I think it's smart to invest in a growing pot stock and hold it for the long term in order to reap all the possible benefits.
Cannabis stocks have experienced a strong rally since Joe Biden won the presidential race in late 2020. Investors expect the Democrats to decriminalize or even legalize cannabis at the federal level in the U.S., which will generate massive demand for pot products. Further, cannabis companies will also have access to traditional forms of finances.
Last month, Aphria announced a merger with Tilray (NASDAQ:TLRY) in an all-stock deal likely to close in the second quarter of 2021. After the merger, the combined entity will generate $874 million in sales, making it the largest Canadian cannabis company.
Aphria can gain traction in the U.S. hemp market via this merger. Further, the company also acquired Sweetwater Brewing Company for US$300 million in a cash-and-stock deal, allowing it to enter the cannabis beverage segment in the U.S.
Since Joe Biden was elected U.S. president on November 3, Canadian cannabis stocks have experienced a renaissance. Investors have taken it as a sign that federal marijuana reform in the U.S. is on the menu, and could spell opportunity for the Canadian LPs looking to gain a foothold in the lucrative market south of the border.
Our research shows that these estimate changes are directly correlated with near-term stock prices. Investors can capitalize on this by using the Zacks Rank. This model considers these estimate changes and provides a simple, actionable rating system.
Ranging from #1 (Strong Buy) to #5 (Strong Sell), the Zacks Rank system has a proven, outside-audited track record of outperformance, with #1 stocks returning an average of +25% annually since 1988. Over the past month, the Zacks Consensus EPS estimate has moved 2.7% higher. APHA currently has a Zacks Rank of #3 (Hold).
Aphria nominated Irwin D. Simon, previously of The Hain Celestial Group, Inc., as Chair of the Board of Directors and interim CEO in December 2018.[9] The company voluntarily delisted its stocks from the New York Stock Exchange in May 2020, in favour of listing them on NASDAQ. In 2020, its stock was delisted from the New York Stock Exchange in favor of solely listing shares on NASDAQ.[10]
Though the recent pullback has opened up a big opportunity for Aphria inc. (APHQF) stock relative to its all time highs, I'm skeptical that this is the time to get back in. Sure, traders are playing around with day to day jumps and dips, but the stock doesn't have a clear driver. Aphria's recent acquisitions have made the stock very overvalued if you actually care about earnings. I missed an entry point around $10 the other morning, but I'm not getting worked up about it. I have put my cash elsewhere for the time being, and will be waiting for Aphria around $8-10. Yes, I believe it can get that low again before the summer.
For me the appeal behind Aphria was always the earnings. The business is run the way a business should be run. Nothing bugs me more than an Elon Musk approach to business. Cough cough.. Tesla (TSLA). Companies that create debt and dilution with the promise of profits later, without regard for the shareholders that are giving up their money. Aphria's management has always worked to drive a profitable medical marijuana business. The consistent quarters of profitability are what I bought stock in, not the grandiose hopes of a massive legal weed market.
I'm not saying that a recreational market in Canada wouldn't be huge for the business. It most certainly would. But the stock valuations were factoring in a lot of unrealized financial gains that these Licensed Producers simply had not acquired yet. I sold Aphria around $18 a share, when most of these Canadian medical cannabis stocks were already trading where the prices would be, IF (and it's a big if) everything revolving around the pending recreational legalization goes according to plan.
I'm glad I sold, because things hit the fan the very next day. A piece of this likely corresponded with the broader market pullback, but the speculative nature of these types of stocks (and the fact that they trade on Canadian exchanges) are causing them to operate partially independent of the broader market. To that end, I think the downswing has more to do with the simple overvalued nature of the industry.
Shares of the Canadian cannabis producer rose as much as 38% after it reported on Thursday evening, putting the stock's performance into positive territory this year. The report beat analyst expectations, led by strong distribution sales.
The solid report comes after the company's disappointing third-quarter earnings when shortages negatively impacted the company's ability to sell weed and an increase in costs ate into the bottom line. Aphria stock tumbled on the news.
The company's stock closed down 14% to $13.95 on Monday, after the company reported that coronavirus lockdowns in parts of Canada and Germany hurt sales of its products in its fiscal third quarter. Revenue tumbled from the second quarter to the third quarter, but was higher on a year-over-year basis.
Agreement DetailsUnder the terms of the Agreement, SweetWater will become a wholly owned subsidiary of Aphria. The unitholders of SweetWater will receive $250 million in cash and approximately $50 million in Aphria stock at closing and are eligible to receive up to $66 million of additional cash under an earnout through the end of calendar year 2023. The initial transaction value represents approximately 12.5x adjusted EBITDA multiple and it is expected to close before the end of December 2020.
Simply put, merger arbitrage is when two companies plan to merge, and the stock price of the target company trades below the proposed acquisition price due to uncertainty of if the deal will actually be completed.
(Short sellers make money when stocks in the companies they target go down, because they borrow other shareholders' shares in those companies, sell them at the current price and then bank on being able to replace the shares they've borrowed for a lower price later on.)
Tuesday's developments did little to assuage investors' fears, as the stock continued its slide. After closing at $7.60 per share on Monday, Aphria was off another 13 per cent, to $6.55, late in the day. Earlier it hit a new 14-month low of $5.83 per share.
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