Investors looking to profit from the merger of Canadian cannabis companies Tilray Inc. and Aphria Inc. would best do so by purchasing Aphria shares, which are trading at a 51% discount on the conversion price of the merger, said the Tuesday Cantor Fitzgerald analyst Pablo Zuanic. . Zuanic reiterated its overweight rating on Aphria APHA stock, + 5.30% APHA, + 5.27% and raised its 12-month price target to Cdn $ 32.50 ($ 25.71) from Cdn $ 26.00. It also maintained its neutral rating on Tilray TLRY, + 7.79%, while raising its price target to $ 30.25 from $ 24.20.
“The recent significant episode of volatility in Canadian cannabis stocks may be another deterrent for investors looking at this subsector (aside from mixed fundamentals and valuation),” Zuanic wrote in a note to clients. “But with landlocked US MSOs (multi-state operators), we continue to believe that the largest and best-managed Canadian LPs deserve a premium for global growth potential.” Read Now: Aurora Cannabis shares slide as analysts weigh in on weak quarterly earnings and a downgrade to sell Planned merger continues to make strategic sense and the combined company could eventually look attractive to consumer packaged goods companies and it could attract an American suitor before the end of cannabis prohibition, he wrote. Read: Cannabis stocks plummet as recovery fueled by hopes for legal reform in the US comes to a sharp halt Combined company will be about twice the size of Canopy Growth Corp.’s CGC, + 5.40% WEED , + 5.36% share in the Canadian recreational cannabis market offers a 51% advantage for Aphria shares and about 4% for Tilray, he wrote. Under the terms of the agreement, Aphria shareholders will receive 0.8381 Tilray shares for each share they own. “Therefore, using TLRY’s closing price of US $ 29 on 12/2, this would mean that APHA’s shares would be worth C $ 31,” Zuanic said. Cantor does not expect the terms of the deal to be renegotiated, but rather sees the gap as a result of recent volatility in Canadian cannabis stocks, with Tilray being the most liquid given its listing on Nasdaq. Read Now: Cannabis Stocks Rebound After Chuck Schumer Leads Campaign for Reforms That May End Federal Ban “We would put the likelihood of other bidders emerging at less than 5% (not for the little TLRY alone ) and the terms renegotiated by less than 20% (we do not believe that TLRY has much negotiating power) ”, said the note. Shares in Aphria are up 19.5% and have gained 371% in the last 12 months. Shares in Tilray are up 7.3% and have gained 79% in the last 12 months. The Cannabis ETF THCX, + 5.09%, up 2.8%, has gained 99% in the same period of time, while the S&P 500 SPX, -0.19%, has gained 16%. For more information on MarketWatch’s cannabis coverage, see: Cannabis Watch