February 10, 2021 - 5:34pm EST by
2021 2022
Price: 26.30 EPS 0 0
Shares Out. (in M): 316 P/E 0 0
Market Cap (in $M): 8,330 P/FCF 0 0
Net Debt (in $M): 0 EBIT 0 0
TEV (in $M): 0 TEV/EBIT 0 0

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Apologies on a short write-up but I suspect this opportunity is fleeting…

RobinHood, WallStreetBets, JPOW, Yellen, passive ETFs and the Everything Bubble have horribly distorted the investing world. This is both a curse and an opportunity. It is a curse if you use fundamental analysis to short securities. It is an opportunity if you take advantage of the insanity with an Event-Driven mindset.

Tilray (TLRY) and Aphria (APHA) both do something with cannabis. During the second quarter of 2021, they will merge to become one company (I hope). The merger was announced on December 16, 2020 and I assume they’re still looking to merge as the deal makes a lot of sense in terms of market share and cost synergies. Then again, this is cannabis, so who knows…?? For the sake of this write-up, I’m going to assume they merge in Q2 as intended.

Every share of APHA will become .8381 shares of TLRY. On Wednesday February 10th, TLRY closed at $63.91 and APHA closed at $26.30. Based on the deal ratio, APHA should be closer to $53.56, minus some small discount for time-value of money. There’s a $27.26 spread to close, which seems awful wide for a deal that most likely closes.

A lot of arbs put some version of this trade on over the past few weeks. They probably wish they had waited.  Over the past few days, retail went chasing TLRY, blowing the spread out and making TLRY hard to borrow.

I think there’s a better way to put this trade on. The March $65 TLRY call closed at $25. Sell it. Then buy 119 shares of APHA at $26.30. You are now putting the same merger arb spread on, but you are immune to the spread blowing out further until TLRY short squeezes above $90 per TLRY share ($65+$25 = $90).

You take in $25 in premium, so you are protected all the way to $5.30 per APHA share ($25/119 shares = $21.00/shr and $26.30 - $21.00 = $5.30). APHA was at that price as recently as October, but I somewhat doubt it can deflate all the way back there by March 19, 2021 (famous last words). If you are worried, pay an extra 13 cents and buy the March $6 put. Given how wide the arb spread is, you won’t even notice those 13 cents missing from your P&L…

Now, here is where the trade gets rather juicy. The deal closes in Q2. Once the March calls expire, you can likely sell April and then even May TLRY calls. You’ll take in a lot of additional premium in addition to the ~$27 merger arb spread and $25 in March call premium if IV stays elevated like it is.

I think the risk here is an upside blow-out in TLRY with the spread getting even wider. In that case, overbuy APHA. No reason to stick with 119 per short call. Why not buy 130 or even 150? Lots of ways to play this depending on your view of where the risks lie. Let's just say that the spread is wide enough that you have plenty of room to be “creative.”


Yes, I know, TLRY is up a few dollars after-hours. APHA is up less. The spread is wider than at the close. Depending on where we open tomorrow, maybe you want to sell the $70 or even $75 call. The situation is “fluid” and all. However, this is a useful framework no matter where we open.

Final Note: Play this small because cannabis is the wild west of finance.

The key is to make money as the arb spread converges and the calls expire. Don't get smoked (haha).

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


Merger Closes

Arb Spread Collapses

Calls Expire

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