Tilray Inc Prices Senior Convertible Notes At 15% Premium To Market; Upsizes Offering

Benjamin A. Smith
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After market today, Tilray Inc (NASDAQ:TLRY) (FRA:2HQ) announced pricing of their previously disclosed $400 million senior convertible note offering. The results, in my opinion, are terrific. Not only did the company minimize the blunt force trauma a straight equity placement would entail at current prices, the conversion and coupon rates are reasonably attractive. We look further into the deal structure.

The news comes just a day following the original $400 senior convertible note announcement Wednesday night. No details on pricing were disclosed at the time, although there was some speculation the conversion rate and coupon could disappoint. Not the case, as it turns out.

The initial conversion rate for the notes settled at 5.9735 shares of Class 2 common stock per US$1,000 principal amount (US$167.41/share). That represents a fifteen percent premium to the last closing price, which is robust considering the historic HFT-fueled run (some may characterize it as “artificial”). The coupon rate is also quite fair. While the rate is akin to more speculative note offerings (biotech sector, for example), at 5% interest, Tilray is only paying 75 basis point above what Canopy Growth agreed to in June 2018. That seems more than reasonable considering Canopy’s balance sheet, production capacity etc. is over 10-times Tilray’s size.

Furthermore, Tilray attracted enough investors that the deal was upsized from US$400 million to US$450 million. Irrespective of perceived valuation concerns of a stock price that’s run way ahead of itself, investors simply want in—lots of them.

After all the book runners are paid, Tilray will net US$435.0 million which it will use to expand operations. One front the company will look to address is the merger & acquisition side, where Tilray has some catching up to do. Which assets the company looks to acquire first are anyone’s guess. But in combination with Canopy Growth’s soon-to-be $5 billion cash hoard expected in weeks, expect M&A activity to pick up in junior and privately-held companies as we close out the year.

Final Thoughts

In my view, Tilray convertible note financing is sweet news to investors ears. While it wasn’t a 42.49% OTM premium (out of the money), 0.25% coupon rate offering an established Tier-1 company such as Twitter Inc. could fetch, the conditions appear reasonable. Considering Tilray went from a C$2.2 billion company in July, to its current C$19 billion dollar valuation today without much material increase in its balance sheet, the conversion ratio is strong. So to is the coupon rate, which is fair and well within acceptable company debt ratio limits as its revenue base begins to skyrocket.

Additionally, investors don’t need to worry about dilution or potential adverse effects changing the stock’s share structure might entail. An important factor for early investors and insiders, considering the lockout period begins to expire in 3.5 months.

The market seems to be taking a positive stance towards the company’s pricing details as well. TLRY finished the after hours session at $150.00/share, ↑$4.43 (↑3.04%). Quick technical levels to note: A closing price above $156.83/share on the hourly time frame with decent volume would support bullish extension; a break below $141.11/share could signal further weakness.

Benjamin A. Smith

Benjamin A. Smith

Ben is a research analyst and capital markets professional with nearly 20 years of experience. His areas of expertise are broad-based, and include extensive knowledge of macro economics, stock/derivative trading, commodity complexes, cryptocurrencies and technical/quant analysis. He also maintains an particular affinity for U.S. politics and the macro-regulatory environment facing...
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