Two top Canadian marijuana producers find themselves in much different places right now. Aphria's (NYSE:APHA) board of directors just rejected a hostile takeover attempt by U.S.-based Green Growth Brands. And Cronos Group (NASDAQ:CRON) awaits the closure of the most important deal in the company's history -- a $1.8 billion investment from tobacco giant Altria.

But while Aphria moves past one failed acquisition attempt and Cronos eagerly looks forward to completing its big transaction, there's another deal the two companies should consider. And it's one that would really shake things up in the cannabis industry. Aphria and Cronos Group should merge.

Two cut-outs shaped like people pushing two green jigsaw puzzle pieces together

Image source: Getty Images.

Why a merger makes sense 

Aphria isn't just trying to move past a hostile takeover attempt. The company is also anxious to escape a dark cloud that's been hanging over its head after short-sellers alleged that it drastically overpaid for its acquisition of LATAM Holdings in a deal that profited insiders.

A special committee consisting of independent directors on Aphria's board recently announced the findings from a review of the LATAM acquisition. This committee found that the price Aphria paid for LATAM Holdings was "within an acceptable range as compared to similar acquisitions by competitors" but was on the high end of the range. However, the committee also determined that some Aphria insiders on the board had conflicting interests in the acquisition that weren't fully disclosed to the board before the deal.

Aphria is making several positive changes to improve its governance. Former CEO Vic Neufeld and co-founder Cole Cacciavillani have stepped down from their executive positions. But while Aphria appears to be on its way to moving out from under the dark cloud, its stock is still priced at a big discount compared to several of its peers, especially when you factor in Aphria's projected production capacity of 255,000 kilograms.

Now let's look at Cronos Group. The company's relationship with Altria could make it one of the most important contenders in the global cannabis industry. But Cronos Group's projected annual production capacity of around 117,000 kilograms isn't even enough to rank the company in the top five among marijuana producers

It would be great if Cronos could buy significantly more production capacity at a relatively cheap price. Such a deal would almost certainly solidify the company's place in the upper echelon of the cannabis industry. And that's why a merger with Aphria makes sense.

Shaking up the industry

The combination of Aphria and Cronos Group would give the resulting entity an annual production capacity of more than 372,000 kilograms. That would rank the combined organization at No. 3 in terms of production capacity, trailing only Aurora Cannabis and Canopy Growth

A merger of Aphria and Cronos Group would also create a company with a strong global presence. Both Aphria and Cronos already have Australian, European, and Latin American operations. The combination of these operations would make Aphria-Cronos Group a force to be reckoned with on the global stage.

There are also two potential outcomes for other major marijuana producers that could result from a merger of Aphria and Cronos Group. Aurora Cannabis would be the only member of the "Big Three" that doesn't have a major partner outside the cannabis industry. This could improve the chances that Aurora makes a big deal of its own along the lines of the one that Altria and Cronos have.

Tilray would find itself in a distant fourth place in terms of production capacity. Although Tilray partnered with Anheuser-Busch InBev to research cannabis-infused non-alcoholic beverages, the deal didn't include an equity investment by AB InBev. Tilray could be more motivated to landing a close relationship with a major partner outside of the cannabis industry if it had to compete against two well-funded rivals with significantly larger production capacities.

Check out the latest Cronos earnings call transcript.

Will a merger happen?

Capacity is critical in the Canadian recreational marijuana market already and will become even more important if international markets take off like many think they will. Cronos Group will need a higher capacity to keep up with its major rivals. The company's investment from Altria gives it the resources needed to expand and make the deals necessary to stay competitive on the global stage.

And while Aphria's board poured cold water on Green Growth Brands' attempted takeover, that doesn't mean the company isn't interested in a deal with another company. Aphria's press release announcing the board's rejection of the Green Growth deal even stated that Aphria's outlook was bright "either as an independent company or in partnership with a strategic partner." The board is clearly keeping the door open for the right kind of opportunity. 

A merger with Cronos Group would probably be the kind of opportunity that Aphria would seriously entertain. It makes sense for both companies and would likely be a win for investors. 

There have been no hints from either Aphria or Cronos Group that they're considering a merger, though. The chances that a deal will happen are probably low right now. But a low probability isn't the same thing as no chance at all.