Tilray IPO Hits During High Times for Hot Cannabis Stock Sector

 | Jul 09, 2018 | 7:03 PM EDT
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Tilray Inc., a Canadian cannabis cultivator backed by private equity firm Privateer Holdings, is expected to draw a warm reception in its stock market debut on the Nasdaq next week.

The Nanaimo, British Columbia-based company plans to offer 9 million shares at an estimated range of $14 to $16 a share for trade on the Nasdaq under the symbol TLRY, according to a July 9 filing.

Based at the midpoint of the range, Tilray will raise about $135 million in proceeds, not including an additional 1.35 million share overallotment that may be exercised by the underwriters of the deal.

A spokesperson for Tilray declined to comment.

Tilray is working with Cowen and BMO Capital Markets as joint book-runners. Cowen is acting as the sole book-running manager for the IPO in the United States, while BMO Capital Markets is holding that role in Canada.

Eight Capital is lead managing the IPO in Canada while Roth Capital Partners is acting as lead manager and Northland Capital Markets is acting as a co-manager for the IPO in U.S.

Based on an IPO price of $15 a share and total combined outstanding Class 1 and Class 2 shares of 91.8 million, the company will go public with a market cap of about $1.38 billion or about 67x its 2017 revenue of $20.5 million. If that seems lofty, compare it to Stocks Under $10 holding Aurora Cannabis (ACBFF) (TSX.V: ACB), which supports a market cap of about $4 billion, or about 196x its annual revenue of $49 million projected from its $12.2 million first-quarter revenue.

While Tilray may not offer much value based on the revenue multiple at its IPO price, it will provide access to a rapidly growing business. It's on track to draw in $31.2 million in 2018 revenue, based on first-quarter revenue of $7.8 million. That would be up about 50% from its 2017 revenue of $20.5 million.

It's also going public at time of keen interest in the sector, as Canada prepares for adult-use cannabis sales in October, and while California, Massachusetts and Nevada launch adult-use sales in the U.S.

Against this background, Aurora has seen its shares rise to more than $7, more than double its levels in late 2017. Another pot stock, Canopy Growth (CGC) (TSX: WEED) has nearly tripled to about $30 a share from under $12 in November.

John Fitzgibbon of IPOscoop.com told Real Money that Tilray is drawing interest ahead of its expected debut on July 19.

"They're running with the tide," Fitzgibbon said of Tilray's IPO timing. "You can't price IPOs against the market and in this case, there's momentum in the sector."

To be sure, the stock to be sold in the IPO will have less voting power. After the IPO, private equity firm Privateer will hold 75 million Class 1 shares, which will account for 93% of the voting power. The Class 2 shares being sold in the IPO will have only one vote per share while Class 1 holders get three votes per share.

But both classes of shareholders will benefit from investments the company plans to make with its IPO proceeds.

Of the estimated IPO proceeds of $140.4 million if the bankers exercise their over-allotment, Tilray plans to spend $52.9 million on the build-out of cultivation and processing capacity at its facilities; $37 million to repay debt and the remainder for working capital.

Privateer is a relatively early investor in cannabis that owns the Marley Natural brand with the family of Reggae icon Bob Marley.

Brendan Kennedy, who co-founded Privateer in 2010, has been at the helm of Tilray since 2013. Tilray appears to be the first public exit for Privateer in its eight years as a firm.

Another big name in the mix is Founder's Fund, the investment firm backed by billionaire Peter Thiel, which took an undisclosed stake in Privateer back in 2015.

Overall, the backers of Tilray appear to come from the realm of smart money.

While they could have held onto the company for a longer period, the timing of the IPO suggests that now is the hot period to sell shares in a cannabis company.

If Tilray's backers have done their homework correctly, management will have offered the IPO with some additional upside to share with public market investors.

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