Why you gotta love the Tilray/Authentic deal
What’s the value of a brand name: no one really knows. Each brand has certain unique qualities that connect the product to its target customer. There is no simple financial formula because the value of some brands can be easily transferred to different products. The Levi’s and Coca Cola name can be tacked on to just about any product anywhere, Tampax, not so much.
In a recent article related to the purchase by Aurora Cannabis (NYSE:ACB) of privately owned Whistler we pointed out how Aurora appears to be paying huge premium for the Whistler brand equivalent to $26.4 per gram of available production. This compares with Aurora’s cash cost per gram of dried cannabis sold of $1.45.
Since Whistler is privately held with little information, we assumed that a good part of the difference between these two figures was for goodwill a.k.a. the value of the Whistler brand name as well as the Organic nature of Whistler production. In short, it seemed obvious that $132 million was a heck of a premium.
Tilray/Authentic is different
No sooner had the digital ink dried on the Aurora announcement then Tilray (NASDAQ:TLRY) announced an agreement with Authentic Brands. Tilray shares have been quite volatile lately in part due to the expiration of the lockup of company shares following the July 15 Initial Public Offering. So it isn’t entirely clear how investors reacted to the Authentic news. However, judging from the near 20 percent overall drop in the price of TLRY shares this week, it is safe to assume there were some naysayers in the crowd.
Before the announcement, it was easy to see where Tilray, a medical cannabis company and the first GMP certified producer in North America was headed. Just a few weeks ago in December, the company signed a deal with Novartis AG's subsidiary Sandoz generic pharmaceuticals to sell, distribute and co-brand Tilray non-smokeable/non-combustible medical cannabis products in legal markets worldwide.
Earlier in September, Tilray became the first company in Canada to be cleared to export medical cannabis to the United States for clinical trials at the University of California San Diego. So, logic suggests that Tilray was moving forward on a fast track with medical cannabis applications.
The Authentic deal details
When the deal was announced on Wednesday, it caught many by surprise, especially anyone not familiar with Authentic Brands Group. These folks own of over 50 of the world’s most iconic consumer brands. Here is just a partial list: Marilyn Monroe, Mini Marilyn, Elvis Presley, Muhammad Ali, Shaquille O'Neal, Dr. J, Greg Norman, Neil Lane, Thalia, Michael Jackson, Nautica, Aéropostale, Juicy Couture, Frye, Adrienne Vittadini, Taryn Rose, Spyder, Tretorn, Tapout, Prince, Airwalk, Vision Street Wear, Above The Rim, and Hind.
How either Tilray or Authentic exploits the advantages of this treasure trove of brands is anyone guess. That can be left to the experts. For its part, Tilray can afford to take the risk because the price is reasonable.
Tilray will pay Authentic an upfront fee of $100 million. In return, Tilray will receive 49 percent of the revenues from cannabis products bearing any of the Authentic Brands with a guaranteed minimum payment to Tilray of $10 million annually for the next 10 years. So even if the deal is a total flop, Tilray is assured of receiving most of the money back.
That is smart risk management.
For a moment, imagine the deal is a success and generates annual sales of more than $10 million. In this case, Tilray receives a 49 percent share and under certain conditions ponies up an additional $250 million.
All by itself, the risk-reward character of this deal is compelling. It immediately gives Tilray entre to a far broader footprint in the consumer market that would require far more time. It also provides a valuable roadmap for long term investors.
The stock took a hit
This week the shares of Tilray have been hammered by the ending of the insider lockup period following its July 15 IPO. Major TLRY holder Privateer Holdings denying any intent for an immediate sale of its position did little to end the sell-off.
Tilray investors have witnessed enormous volatility over the past year ($24-$240) that includes a 70+ percent drop since September.
Nevertheless, Tilray stock has been a superior investment almost tripling in price in the last year. There are six analysts offering advice on the company according to Market Realist. The group is split equally between recommendations of Buy and Hold. One thing they agree on is the price expectation for 2019 at $127 per share. This is more than 50 percent above current levels.
Of course, analyst long term predictions are wrong almost half the time; it is nevertheless comforting to have Wall Street support.