Cannabis producer Tilray (TLRY -2.45%) is among many Canadian businesses jockeying for position in the U.S. pot market, even though it isn't open just yet. One of the ways it can penetrate the market is through beverage companies that aren't currently selling cannabis-related products but could be leveraged to help enter the lucrative cannabis beverage market in the future. Plus, it gives the business a way to diversify its operations outside of marijuana.
And that's what Tilray has done with yet another acquisition in the U.S. But will all this wheeling and dealing pay off, or could it lead to more challenges ahead for the business?
Image source: Getty Images.
Acquisition of Breckenridge Distillery will open up more opportunities and add to Tilray's bottom line
On Dec. 8, Tilray announced that it would be acquiring Colorado-based Breckenridge Distillery, which it says is "widely known for its award-winning bourbon whiskey collection and innovative craft spirits portfolio." There are two key aspects of note in the deal: First, the deal will be immediately accretive to the company's earnings before interest, taxes, depreciation and amortization (EBITDA), meaning Breckenridge's profits will reflect on Tilray's financial reporting as soon as the next quarter.
Second, when it's legal to do so (i.e., when the U.S. legalizes marijuana at the federal level), it will allow Tilray to develop new products, including cannabis-infused whiskey.
While the new opportunities are great, communicating profitability (on an adjusted EBITDA basis) is also essential. When the company released its first-quarter numbers for its fiscal 2022 in October, it marked the 10th consecutive period where Tilray posted an adjusted EBITDA profit, which is a streak it certainly doesn't want to interrupt. Moreover, maintaining a profit is one way Tilray can differentiate itself from other cannabis companies, many of which struggle with breaking even.
The move complements a broader strategy for Tilray
The beverage industry isn't a new target for Tilray. In Q1, it reported $15.5 million in revenue from alcoholic beverages from the SweetWater Brewing Company, which Aphria (which has since merged with Tilray) acquired last year. SweetWater is among the largest independent craft brewers in the U.S., and Tilray announced in November that it has entered the spirits category with the launch of two ready-to-drink cocktails. Tilray's interest in the cannabis beverage market goes back to 2018, when it announced a research partnership with Labatt Breweries of Canada, which beverage giant Anheuser-Busch InBev owns.
According to Fortune Business Insights, the global cannabis beverage market is one of the hottest growth sectors right now. Analysts expect the market to grow at a compound annual growth rate of 50.9% until 2027, when it will become worth more than $8.5 billion. So it's a significant opportunity for the sector, and one that Tilray clearly wants to cash in on.
More acquisitions could be on the way
Growth is the focus for Tilray as it announced a goal of hitting $4 billion in annual revenue by 2024. However, the company is not even at an annual run rate of $1 billion, so it has quite a way to go. That's a big reason why I expect many more acquisitions on the horizon for the company in the next few years.
While that will grow its top line, the danger for investors is that it could also mean more dilution. This recent acquisition of Breckenridge cost the company $102.9 million, funded entirely through shares. And Tilray has burned through $82 million in cash from its day-to-day operations over the past four quarters. Not only does it need to raise cash for these acquisitions, but it also needs to do so just to maintain its current operations.
Does this acquisition make Tilray a better buy?
Tilray is in a risky spot right now because it has put all its cards on the table, aiming for $4 billion in revenue in just a few years. In a rising interest rate environment where it could soon become more costly to raise debt, there could be lots of dilution on the way for investors as management may resort to raising equity capital.
Its shares have already crumbled 58% in the past six months (the Horizons Marijuana Life Sciences ETF is down 41% during this time), and issuing more stock will only make things worse for investors. Moreover, acquisitions come with complexity that could create challenges. And given that more are likely on the way for Tilray, investors should tread carefully with this pot stock as things could worsen before they get better.
