Aphria, Anticipating Fed Legalization, Enters US Via $300M StreetWater Deal

Canadian cannabis giant Aphria Inc. APHA decided to present its charms on the American ground through the acquisition of SW Brewing Co. LLC in a deal worth around $300 million.

SweetWater Brewing, one of the biggest craft brewers — volume-wise — in the U.S., was founded 23 years ago. Since then, it expanded both nationally and internationally.

Now, its products reach consumers in 27 states, Washington, D.C., and in more than 50 countries across six continents.

Aphria disclosed several possible strategic and financial benefits coming from this deal, one of them being simple and accelerated access to the U.S. market in case of federal legalization.

From the financial aspect, the “combined branded cannabis lifestyle products company” should reach around CA $650 million ($498 million) to CA $675 million of annualized pro-forma net revenue, and about CA $65 million to CA $70 million of annualized pro-forma adjusted EBITDA.

Other benefits include notable cross-selling opportunities, and the addition of an accomplished executive team.

Under the agreement, which is projected to close by the end of December 2020, SweetWater will become a wholly owned subsidiary of Aphria.

The purchase price was set at $250 million in cash and around $50 million in Aphria stock. The unitholders of SweetWater could also obtain an extra $66 million in cash under earnout by the end of 2023.

The Ontario-based cannabis company anticipates this purchase will help build up EBITDA and diluted EPS right away.

"Our strong balance sheet and access to capital have enabled us to enter the U.S. through this strategic and accretive acquisition. We will establish and grow our U.S. presence through SweetWater's robust, profitable platform of craft brewing innovation, manufacturing, marketing and distribution expertise. At the same time, we will build brand awareness for our adult-use cannabis brands, Broken Coast, Good Supply, Riff and Solei, through our participation in the growing $29 billion craft brew market in the U.S. ahead of potential future state or federal cannabis legalization," stated Aphria Chairman and CEO Irwin Simon.

In the light of the acquisition, Cantor Fitzgerald analyst Pablo Zuanic restated their Overweight rating on Aphria with their 12-month price target at CA$11.75.

Zuanic said they are not being particularly enthusiastic about the purchase. He based this by defining value on Incremental ROIC versus cost of funds or price paid versus actual value.

On the other hand, Zuanic noted that SweetWater is a company with strong cash flow, hence value can be there if the deal was to be seen as a “defensive diversification move.” Nevertheless, the analyst added that the management actually declined this labeling the deal more of a “strategic move to build a global CPG company.”

On the strategic benefits Zuanic holds the opinion they are more of a “long-term nature” emphasizing that the timing of federal legalization is uncertain.

“In a fragmented market, we do not think this would be a cost-efficient way to build brand awareness (why not just license the brands?). But if APHA wants to be valued in terms of cannabis growth potential, we would have preferred a more directly related cannabis deal.”

Aphria's shares were trading 10.66% higher at $5.50 at the time of writing.

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