Privateer Won’t Flood the Market with Tilray Shares in the Short Term: Implications

Tilray (TLRY) recently announced its biggest shareholder Privateer has signed a non-binding letter of intent to increase the length of its lockup period.

Privateer, a company backed by billionaire venture capitalist Peter Thiel via his Founder's Fund, owns 75 million shares of Tilray, representing 77 percent of the 89.5 million in outstanding shares. It's also why overall institutional ownership only accounts for about 3.80 percent of the total. That will change significantly over the next year.

The deal

In preparation for a merger between the two companies, Privateer has been divesting of other assets over the last year or so. During that time Privateer locked up its shares during negotiations.

As for selling the shares, the company will offer shares via marketed offerings to institutional, or possibly individual wealthy investors. After that, it'll release shares in a staggered manner so the impact on the market is reduced. That of course was a move to somewhat limit the effect of dilution on existing shareholders.

This is of particular importance to investors because the increase in the number of institutional investors should help reduce the huge swing in share price the company has experienced since it went public.

What to watch for

The implications of these decisions is as already stated, to keep existing shareholders from being quickly diluted. But it also presents another problem, which is the consistent release of restricted shared to unrestricted status.

Even though they won't be released at once, there is the problem that could accompany a major institutional or wealth investor wanting to buy up a lot of shares at once, which is almost certainly going to be agreed upon by the companies.

This is probably why it's a non-binding agreement; the companies want the flexibility to do what's best under unfolding circumstances as opportunities present themselves.

In the short term this could be a positive catalyst for those long on the company, as shorts have been positioning themselves in anticipation of millions of Tilray shares flooding the market. Now that it's unlikely to happen, they will probably scramble to cover their positions, driving the share price up.

Interestingly, Tilray Chief Financial Officer Mark Castaneda says he doesn't think all 75 million of the shares held by Privateer will be sold.

Castaneda pointed out that Privateer, by agreeing the measured selling off its shares, underscores a belief in the company. That may be true, but if it were to sell the majority of the shares at once, it would also be undermining its own return on investment by weakening the earnings potential for a significant period of time.

It can be legitimately concluded by investors that by watching out for its own self interests, Privateer will keep dilution in check over the next couple of years.

Conclusion

It is significant that Privateer isn't attempting to rapidly extract its profits from Tilray in the near term. It could point to the company believing in Tilray, but as mentioned earlier, it also points to its own self-interests. If it floods the market with too many shares in a short period of time, it could lose a lot of value.

Investors need to understand the fact that shorts are already covering their positions. If Privateer had released all the shares for sale, the share price of Tilray would have quickly plummeted. And in those types of situations, it's difficult to know how long it would remain under pressure. Its share price could have languished for a long period of time. That's what this is really about.

One other factor to take into consideration is while the release of the shares for sale is going on, Tilray is still a company trying to increase revenue, and ultimately earnings. If it's able meaningfully accomplish that over the period of time Privateer is selling the bulk of its shares, it could attract a lot of institutional interest which would drive up the share price of the company.

How this plays out will be determined by the pace and media coverage of the sell-off in shares, as well as how rapidly it can boost revenue and earnings. This will be the tug-of-war over the next couple of years, and investors should watch closely which narrative is winning out at any particular time.

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