In December, Aphria (APHA) and Tilray (TLRY) announced plans to merge. The combination of the two Canadian cannabis operators would create the biggest cannabis company in the world based on pro forma revenue.
Both companies expected the deal to close in the second quarter. However, what had been hoped to be a smooth transaction hit a bump in the road last week. Is the Aphria-Tilray merger in trouble?
Changing the rules
Tilray shareholders were originally scheduled to vote on the proposed merger in a special meeting on Friday, April 16. That meeting was convened but then immediately adjourned until April 30.
What happened? Tilray's board of directors changed the rules for the business combination at the last minute.
In the past, to reach a quorum for Tilray's shareholder meetings required shareholders representing a majority of the voting power of outstanding shares. However, last Friday, Tilray's board approved an amendment that lowers the bar. Now, shareholders representing only one-third of the voting power of outstanding shares are required to reach a quorum.
It certainly appears that Tilray was having a hard time convincing shareholders that the Aphria merger was in their best interests. The two companies' latest quarterly updates could be a factor in Tilray shareholders' reluctance. While Tilray delivered improving results in its fourth-quarter update, investors hated Aphria's third-quarter results announced earlier this month.
Probably a go now
So is the planned merger of Aphria and Tilray in trouble? Probably not now.
Aphria's shareholders overwhelmingly approved the deal in a vote held on April 14. Nearly 99.4% of shares voted for the merger. At least two-thirds of the votes cast had to be in favor of the deal for it to pass.
With Tilray's quorum threshold now lower, it's likely that the company's shareholders will also approve the transaction later this month. Tilray's board of directors almost certainly wouldn't have established a new quorum requirement that it didn't know could be met for the merger vote.
There will be only one additional hurdle to jump if enough Tilray's shareholders vote for the merger: A Canadian court must also approve the combination of the companies. However, that approval probably won't be an issue.
Both of these Canadian marijuana stocks have been huge winners in 2021 as investors eagerly anticipated the merger. Aphria's and Tilray's share prices have more than doubled year to date. At one point earlier this year, Tilray stock skyrocketed more than 670%.
Keeping the sizzling momentum going won't be easy, though. COVID-19 could continue to be a headwind for the combined entity. Aphria blamed the pandemic as the primary culprit behind its lower sequential revenue in its latest quarter.
Tilray faced COVID-19-related issues in Q4 also. The company reported an 18% year-over-year decline in hemp segment revenue from its Manitoba Harvest business. Changes in consumer shopping patterns due to the pandemic stood out as a major factor behind the sales drop.
But COVID-19 isn't the only challenge for the companies after they merge. Average retail selling prices for both medical and recreational cannabis in Canada have fallen. Competition in the Canadian market is intense.
Some investors could be banking that cannabis reform in the U.S. will provide a big boost to the combined company, which will be named Tilray although Aphria shareholders will control 62% of the company. However, such reform isn't a done deal -- and even less of one than the Aphria-Tilray merger.
There's also no guarantee that the new Tilray will be able to achieve the success in the U.S. that some investors hope it will. Aphria's U.S.-based Sweetwater craft brewing business and Tilray's Manitoba Harvest hemp foods business don't give the new entity as strong of a launching pad into the U.S. cannabis market as some big rivals have.
The planned merger might not be in as much trouble with Tilray's recent rule change. However, the post-merger future for the new Tilray certainly won't be trouble-free.