When Tilray Brands (TLRY 1.71%) announced on Aug. 7 that it was buying eight of Anheuser-Busch InBev's (BUD 0.12%) beer brands, the market was positively exuberant. Tilray's share prices jumped by around 20% in a day. Investors are now reassessing the true scope of the company's ambitions in the U.S. alcoholic beverage market.
But how does this latest move change Tilray's long-term potential as an investment? Let's look at the details.
Tilray is on track to become a major competitor in American beer
Though it was originally a cannabis business, Tilray had a craft beer lineup before the deal that was starting to look impressive. Its six brands were gaining traction, with the beer segment's revenue growing 43% year over year to reach more than $32 million in its fiscal fourth quarter (ended May 31). It also posted slightly stronger gross margins.
Regional brands like Montauk Brewing were starting to expand outside their home areas, and some of SweetWater Brewing's more experimental beers appeared to be finding a market. Likewise, Tilray's alcohol distribution business expanded by 19% compared to a year prior, bringing in $73 million.
Now Tilray looks like it could become a beer giant, for several reasons. Per the terms of the acquisition, which is for an undisclosed sum of cash, it'll be able to use Anheuser-Busch's distribution networks to compete in the U.S. market, including its partnered distributors. That's a gargantuan network, which distributes practically everywhere in the country.
Tilray will also have four new brewing facilities, up from its pre-acquisition total of only two. In other words, its production capacity has tripled while its distribution capacity is becoming incalculably higher. And those are bullish factors for the stock's future.
Buying these beer brands shows that the company is serious about its ambitions to become one of the top 10 brewers in the U.S. by revenue. Owning the rights to popular products like Shock Top's Belgian White makes it a credible competitor in the space, and will likely help to generate free cash flow (FCF) in the near future. Furthermore, when looking at the craft beer market in isolation, it'll become the fifth-largest player, with a market share of around 5%.
In total, management is expecting to bring in around $300 million in alcohol revenue annually, with $250 million of that coming specifically from the newly purchased craft beer brands. Tilray didn't even need to go through the effort of building the value of the brands it's buying, but it will capture the competitive advantage of some consumer loyalty nonetheless.
Beyond that, there are a few ancillary benefits to the purchase. Tilray will pick up eight new brewpubs on top of the four it already owns, which means that more consumers will have exposure to its beers. There should also be some cost synergies to realize, though there hasn't been an estimate of how much those might be worth, or when they might be reported (after the deal's closing, sometime before the end of the year).
The cannabis tie-in will be huge, eventually
There's one other giant benefit to Tilray's acquisition of these beer brands. If and when cannabis is legalized in the U.S., the company will be able to use its soon-to-be gargantuan distribution network to sell its marijuana products everywhere, like it currently does in its home market of Canada. That will give it a major edge over other domestic marijuana businesses, which it'll need to make up for the fact that it doesn't currently have any presence in the U.S. marijuana industry due to the plant's illegality at the federal level. Plus, the distribution network will bolster the capabilities of the U.S.-based company called MedMen that it plans to acquire a minority stake in upon national-level legalization.
For now, investors await more information about how much the deal cost. The company only has $207 million in cash and $242 million in liquid investments, and its trailing-12-month (TTM) cash burn was roughly $102 million. So there are some clear limits on how much of an outlay it could be making, though it's possible that taking out new debt could finance the transaction. No matter how much it costs, Tilray may need to work to make its investment a profitable one, and the market's opinion could change overnight if Tilray is perceived to have overpaid.
But is the stock a buy? After a few years of turbulence and a falling share price, it's getting there. If you're willing to keep a long-term mindset and you can tolerate a steep dip or two between now and when the company starts to report profitable growth, it's reasonable to start building a position today. Just don't bet the farm until there's evidence of a competitive advantage that could protect its (currently nonexistent) profit margin.
