Tilray's Deal to Buy Hemp Food Maker Bolsters Marijuana ETF

The easing of rules and regulations on the once highly guarded drug, marijuana, for recreational and medical usage has led to consolidation in the pot industry, which is buzzing hot with a wave of mergers, acquisitions and other deals. The latest catalyst is Canadian cannabis firm Tilray Inc. TLRY, which has announced a deal to acquire the world’s largest hemp food maker Manitoba Harvest for up to C$419 million ($318 million).

Inside The Deal

Tilray will initially pay C$277.5 million (C$150 million in cash and C$127.5 million in Tilray shares) at the close of the deal, expected within the next 30 days. The remainder will be paid six months after closure and achievement of certain milestones.

The combined company will bring nutritious hemp foods and supplements to more households across the United States and Canada. The acquisition will expand Tilray’s product portfolio into the natural foods category and bring Manitoba Harvest expertise in working with cannabinoids, including cannabidiol (CBD). It gives Tilray an immediate position in the North American hemp CBD market. As such, Tilray expects to launch CBD-derived products in the United States as early as this summer (read: Why Marijuana ETFs are on a High in 2019).

The planned acquisition comes within a few months of Trump’s farm bill, which legalized commercial production of hemp in the country and opened access to a large market for Tilray and its peers.

Big Opportunity in CBD Market

With this deal, Tilray appears to be leapfrogging its biggest rivals — Aurora Cannabis ACB and Canopy Growth CGC — in capitalizing the rapidly expanding U.S. CBD market. Canopy Growth is the first company to tap on the CBD market by announcing that it had secured a license to produce and process hemp in New York state. Canopy Growth expects to market hemp-based CBD products by the end of 2019 in U.S. states where they are allowed. Meanwhile, Aurora Cannabis is in the process of acquiring hemp assets (read: Forget Mixed Pot Earnings; Bet on ETF on Growth Prospects).

Some analysts estimate that the U.S. CBD market could be worth more than $20 billion by 2022, up from the current $600 million. The Hemp Business Journal projects that the market will grow to $1.3 billion by 2022, reflecting an impressive compound annual growth rate (CAGR) of more than 27%. Per Cannabis market researcher Brightfield Group, the U.S. hemp CBD market will soar to $22 billion by 2022.

ETF Impact

The announced deal has bolstered the outlook of the already high-flying ETFMG Alternative Harvest ETF MJ. It is the first and only pure ETF targeting the cannabis/marijuana industry.

The fund tracks the Prime Alternative Harvest Index, designed to measure the performance of companies within the cannabis ecosystem, benefiting from global medicinal and recreational cannabis legalization initiatives. The fund holds 38 securities in its basket with each accounting for no more than 8.21% of assets.

Canadian firms make up 61.9% of the portfolio, while American firms comprise 24.2%. With AUM of more than $1 billion, the ETF trades in a solid average daily volume of around million shares and charges 75 bps in annual fees. It has soared 45.3% so far this year (read: Marijuana ETF Joins Billion Dollar Club).

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