Tilray Brands (US:TLRY) made headlines Tuesday after announcing its acquisition of eight craft beer and beverage brands from Anheuser-Busch (US:BUD) for $85 million.

The news gave TLRY stock a nice jolt, lifting it from its narrow trading range that it fell into after the Memorial Day holiday.

This move promises to elevate Tilray’s standing in the craft beer industry, moving from the ninth to the notable fifth position, and is expected to generate substantial growth for the firm in the near and long term.

Tilray’s acquisition consists of several well-respected brands: Shock Top, Breckenridge Brewery, Blue Point Brewing Company, 10 Barrel Brewing Company, Redhook Brewery, Widmer Brothers Brewing, Square Mile Cider Company, and HiBall Energy.

This deal, to be settled entirely in cash, bolsters Tilray’s arsenal, with year-end cash and cash equivalents nearing $0.5 billion. The acquired brands bring with them an estimated sales value of around $180 million.

A chart from Fintel’s financial metrics and ratios analysis page for TLRY highlights the growth in sales against operating and net profitability. Note this is not underlying and shows the statutory figures.

Strategic Shift

While some critics have expressed reservations about Tilray’s diversification from being a pure play cannabis company, its acquisition clearly signals a strategic shift toward becoming a global diversified cannabis-lifestyle and CPG entity. The brands from ABI play into this larger narrative, fitting seamlessly into Tilray’s ambitious beverage portfolio.

The deal showcases impressive financial sense. Acquired sales are projected to be around $180 million, with EBITDA approximating $14 million. This puts the trailing EV/sales at 0.5x and EV/EBITDA at 6.0x, comparatively lower than when ABI had acquired a company of 23 brands back in 2020.

Synergies from the acquisition offer great potential. Advantages include excise tax benefits, stronger negotiating power, enhanced distribution channels, and facility rationalization. While there’s been a noted volume decline in the acquired brands recently, attributions can be made to post-COVID craft headwinds and ABI’s shifted focus due to the brands’ smaller scale.

Future Prospects

A major factor in this acquisition is the foresight toward potential federal cannabis legalization in the US. Two significant advantages arise:

• A built-in distribution network ready for cannabis brands upon US legalization.
• The ability to integrate cannabis branding within the craft beer portfolio, amplifying brand awareness ahead of any legalization.

Post-acquisition, Tilray is expected to triple its beer business volume, reaching up to 12 million cases annually. Pro-forma alcohol portfolio revenue with the acquired brands is projected to hit  about $300 million. Despite uncertainties in the craft beer segment, marked by its declining sales over the past two years, Tilray’s management remains confident about the synergistic benefits from this deal.

Analyst Thoughts

RBC Capital Markets analyst Douglas Miehm bumped up his TLRY target price to $3.75 from $3 on his ‘sector perform’ call after the deal was announced. Miehm told investors that he believes the $85 million price tag for the brands seems attractive and likes the boost Tilray gets in the US craft beer rankings.

The analyst did raise concerns since revenue has declined for the last three years but notes that it was likely impacted by the pandemic especially for on-site consumption at venues.

Fintel’s consensus target price of $2.76 suggests the market valuation determined by analysts was below where the stock ended up closing yesterday. However, we have already observed analysts raising target prices as the deal will add to the bottom line and so believe this average target will drift higher in the coming weeks.

Institutions Absent

Research on the Fintel platform on institutional and hedge fund activity revealed a 5.4% drop in the total number of holders on the register during the most recent quarter to 371 in total. The average portfolio allocation has also declined by 60.5% during this period, in part driven by a falling share price.

TLRY stock garnered a Fund Sentiment score of 22.30 on Fintel’s quant dashboard, at last look. That puts it in the bottom 4% of stocks when screened against 36,391 other global securities for the highest levels of institutional buying activity.

It will be key for Tilray’s CEO Irwin Simon to re-ignite institutional interest in the stock as it targets growing profitability from synergies and further acquisitions.

The chart below shows the relationship with the number of shares held by institutions against the share price over the last five years.

As Tilray marches toward the $1 billion revenue milestone, we can expect further transactions in the cannabis and craft beer industry, which may have the potential to further boost the stocks valuation, depending on price and profitability.

As the deal awaits its anticipated closure by the end of September 2023, shareholders and analysts will await further details from management about the planned integration of the business and any other benefits that may be realized in the process.

This article originally appeared on Fintel

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