Shares of Tilray (NASDAQ:TLRY) were trading 19.7% higher as of 11:42 a.m. EDT Monday. The Canadian cannabis producer announced that it had signed a non-binding letter of intent with its largest stockholder, Privateer Holdings, that will extend the lock-up period for up to two years on the 75 million Tilray shares it owns.
This announcement provides a big relief to Tilray's other shareholders. Privateer Holdings currently owns around 77% of Tilray's outstanding shares. The private investment firm agreed earlier this year that it wouldn't sell any of its Tilray stock until the second half of 2019. Had Privateer chosen to sell a large fraction of its shares, that could have created significant downward pressure on Tilray's stock price.
The new agreement is actually pretty complicated. Privateer will be merged with a Tilray subsidiary, and its stock in Tilray will be canceled when the merger finalizes. But Tilray will issue an equal quantity of new shares to Privateer's stockholders. In other words, Privateer Holdings will go away, but its stockholders will still own as much of Tilray as they do now.
The advantage to Tilray is that those new shares will have a lock-up period of up to two years, so investors won't have to worry for a while about the possibility that they could be dumped on the market in a way that would tank the stock price.
It's natural that Privateer is working with Tilray in a way that should prop up the stock. It provided the cannabis company's initial financing, and Tilray operated as a wholly owned subsidiary of Privateer until it obtained other funding in early 2018. Tilray CEO Brendan Kennedy is also the co-founder and executive chairman of Privateer Holdings.
So far, though, there's only a letter of intent about this deal. While the merger details are being worked out, Privateer has agreed to not sell any of its Tilray shares.
Once this transaction is finalized, Tilray will be able to shift its full attention to several key opportunities, among them the anticipated opening of the Canadian market to cannabis edibles and other derivative products later this year. Tilray will also focus on growing Manitoba Harvest's hemp foods business. Investors would also be well advised to closely monitor the U.S. Food and Drug Administration's progress in establishing regulations for the hemp CBD market.