Top marijuana stock Tilray (TLRY) flexed its financial muscles today, acquiring Manitoba Harvest, a natural foods company, for up to $419 million Canadian dollars ($316.3 million), including milestones. The acquisition provides Tilray with a platform it can leverage to create foods that use cannabis as an ingredient. Edibles are expected to increase the marijuana market opportunity because many people who are curious about cannabis are not interested in smoking or inhaling its vapor.
A budding opportunity
The United Nations estimates $150 billion is spent worldwide every year on marijuana, which remains illegal in most places. But momentum has been building to legalize it, and as a result, a growing number of jurisdictions, including Canada, are passing laws that create legal marijuana marketplaces.
In Canada, a national medical marijuana market has been operating successfully since changes in 2014 created a licensing program. A new recreational adult-use marketplace opened there in October, too. Canadians spend roughly CA$6 billion annually on marijuana, according to Statistics Canada, and while most of that spending remains in the black market, estimates suggest Canada's legal marijuana markets could generate sales of roughly CA$4 billion in 2019.
In the U.S., marijuana remains illegal at the federal level, but 33 states have legalized it in one form or another, including 10 states that have passed laws allowing recreational adult use. Overall, the U.S. market is valued at $50 billion.
The size of the global marijuana market could be much larger in the future. Many consumers are curious about it but have avoided it because of its legal status or because they don't want to smoke it or use a device to inhale its vapor.
Recognizing the potential associated with making marijuana more accessible, cannabis companies are researching edibles that include cannabis extracts as ingredients. For example, HEXO announced a collaboration with Molson Coors (TAP -1.51%) last August to pursue opportunities to develop nonalcoholic, cannabis-infused beverages for the Canadian market. Similarly, beer, wine, and spirits giant Constellation Brands (STZ -1.45%) acquired a 38% stake in Canopy Growth (CGC 22.15%) last year, increasing the likelihood of Canopy's cannabis being used to create beverages.
The potential to reach more customers through new consumer goods products has Constellation Brands estimating that the legal global marijuana market could be worth over $200 billion in 15 years.
Tilray takes aim
Tilray has long indicated that it has a big interest in profiting from cannabis foods offering medical benefits, or nutraceuticals, and its decision to buy Manitoba Harvest could help it deliver on that goal.
Founded in 1998, Manitoba Harvest is the largest producer of natural foods containing hemp, a nonpsychoactive strain of cannabis. Its products use hemp extracts, including cannabidiol (CBD), a chemical found in hemp and marijuana that's associated with wellness.
Manitoba Harvest's products, including Hemp Yeah! granola and protein powder, are available in 16,000 stores across Canada and, importantly, the United States. In December, the U.S. Farm Bill removed hemp from the controlled substances list, clearing the way for Canadian cannabis companies to enter the U.S. market via hemp-derived products. Canadian pot companies that are listed on major U.S. exchanges are prohibited from doing business in the U.S. because of stock exchange rules banning companies that engage in businesses that are illegal at the federal level.
In exchange for Manitoba Harvest's existing product line, facilities, and distribution channel, Tilray's paying CA$150 million in cash and CA$127.5 million in Tilray stock up front. It will also pay CA$50 million in cash and CA$42.5 million in Tilray stock six months after the deal closes. Furthermore, Tilray could issue up to CA$49 million in Tilray stock if Manitoba Harvest achieves pre-set milestones this year.
Check out the latest Tilray earnings call transcript.
What it all means
Tilray is one of the largest Canadian marijuana stocks by sales and market cap. It hasn't announced its results for the quarter ending Dec. 31 yet, but in Q3, its sales were CA$13 million, up 86% year over year, and its kilograms sold totaled 1,613, up 136% year over year. That's good enough to rank it in the second tier of pot stocks by sales. A small share float and excitement about potential partnerships inflated its share price last year, but even with the pullback from its peak, it still boasts a $7 billion market cap.
The valuation is sky-high relative to its sales, but there's undeniably a huge opportunity for sales growth at this company and its peers. It remains to be seen which companies end up succeeding, but this deal provides Tilray with a great way to establish a foothold in the U.S. and expand its reach in Canada. Marijuana edibles, including beverages, are expected to get an OK for sale in Canada as soon as this year.