Tilray Inc Raises $400 Million in Shrewd Convertible Senior Note Offering

Benjamin A. Smith
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Tilray Inc (NASDAQ:TLRY) (FRA:2HQ) has finally pulled the trigger on their much anticipated capital raise. The company announced they intend to offer $400 million in a senior convertible notes, thus minimizing the blunt force trauma a straight equity placement would entail at current prices. We explore the offering and the potential effect of its common shares in more detail.

Tilray delivered the material news after the bell today. The company intends to offer, subject to market conditions and other factors, $400 million aggregate principal amount of Convertible Senior Notes due 2023 via private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933. The initial purchasers of the notes will be granted an option to purchase up to an additional $60 million aggregate principal amount of notes. Notes will be senior unsecured obligations of Tilray and will accrue interest payable semiannually in arrears.

Apart from the common terms of the deal, Tilray has maneuvered a key element of control. The notes will be convertible into cash, company Class 2 common stock or a combination of cash and Class 2 common stock at Tilray’s election. Therefore, the notes are not necessarily dilutive in the near or long term, although it will cost the company, at minimum, tens of millions by way of semi-annual coupon payments or equity.

The move fills Tilray’s coffers with much needed working and acquisition capital. As we’ve noted previously, the company was hamstrung in its ability to utilize straight shareholder capital, as volatility generated by its ultra-tight share structure reeked havoc on fair market pricing mechanisms. With this convertible senior note offering, Tilray bypass this pitfall, as the notes may simply become a senior debt obligation the company pays interest on, and little more. While upcoming interest charges will become a net drag on Tilray’s balance sheet, it can mitigate these costs by expanding its business at growth rates faster than the coupon rate it’s paying out.

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The million dollar question everyone is asking about is pricing. The company did not release pricing on common share conversion rate for the notes, nor the coupon rate it intends to pay. This, along with repurchase or redemption rights will be determined at the time of pricing of the offering.

In my view, the calls of impending doom for TLRY post-announcement have little merit. Surely, no investor would be silly enough to purchase TLRY notes at par with the closing price per $1,000 principal amount would they? Surely, TLRY is destined to trade down to its convertibility price which is somewhere far lower, right? Not so fast.

First of all, the devil is in the details. Without knowing the full indentures of the transaction, it’s impossible to know what conversion price investors are willing to accept. Although Tilray is deciding convertibility, there may be rights and sweetners granted to shareholders based on any numbers of stipulations. This remains an unknown at this time.

Tilray could also elect to offset the amount required to pay or deliver in excess of the principal amount upon conversion of the notes. This can be achieved via convertible note hedge transactions, which utilize the options market to mitigate risk. That way, note investors can profit regardless of whether Tilray goes up or down, by shorting the common stock and profiting directly if TLRY trades lower, or converting the note should TLRY rise in value. Again, without knowing the transaction indentures, investors have no idea whether these methods are being considered.

Finally, large bull runs in other U.S. equities have not deterred aggressive conversion pricing in similar deals. For example, Wix.com Ltd. priced $385 million aggregate principal amount convertible senior notes due 2023, in a private offering announced in June 2018. Despite a 384.46% run-up in prices in a 2-year period prior to the offering, Wix.com settled on an initial conversion price of $142.63 per share—representing a 35% conversion premium to the last reported common share price on June 21, 2018. Other companies such as Rapid7 Inc. and Rew Relic Inc. were able to attain similar pricing.

Granted, Tilray is a whole different animal when it comes to excessive and rapid valuation. But for detractors who believe Tilray is destined to fall following the transaction, I believe a more measured assessment of the situation is warranted. While the news is not particularly bullish for the stock in the short term, the offering is less than 2.5% of Tilray total market capitalization. Therefore, it’s important to keep that context in mind.

In the after hours, TLRY finished the session at $148.74/share, −8.09 (↓5.16%).

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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