Unless you’ve been living under a rock, you’ll know that Aphria ($APHA) is acquiring Tilray (TLRY), by using an exchange of shares at a ratio of .8381 $APHA/$TLRY. All shareholders will ultimately hold $TLRY equity, the $APHA bit will be no more.

On the day the deal was announced, $TLRY was trading at $9.33 USD, $APHA at $8.08USD ($10.31 CAD @ $1.2753). This implies an exchange ratio of .8683 – which means that of the date announced, it wasn’t far off from the deal itself.

Since the announcement, the actual spread has been widening – opening up significant gap between the two companies valuation. This begs a question. With a known conversion that will occur on close, the market *should* hold that price spread between the two companies. I mean, if I have a share of $TLRY at say, $10, I know that $APHA’s coming in at $8.381.

What has been happening as price continue to run, is that spread has been widening.

This chart from yesterday (courtesy of Cannalyst friend STD’s), reveals that spread is approaching $4…..and has been heading in one direction since the beginning of January.

I’ve been noodling this around hard. Blue and I both have been plucking industry strings to see if we can’t get perspective on it. And we’ve got nothing.

The situation implies that Tilray is trading at a $4 premium to Aphria, when all things are equalized. It’s a true head-scratcher.

I got a nudge that optionality in some $APHA convertible notes goes live prior to their initial strike date due to the merger.

Way back on April 17th, 2019, $APHA had issued convertible notes in the amount of $300MM USD. They pay 5.25% interest and mature on June 1, 2024. The conversion feature was priced at a 20% premium to market at the time, translating to a fixed price of $9.38USD. The note has various triggers and provisions for ‘early’ conversion/redemption for both Aphria and the note holders as well.

Should any of the notes be brought forward to $APHA for redemption prior to maturity, they’ll subject to specific conditions and only within certain time frames. At least until Dec 2023. After that, note-holders have free reign. Upon conversion, $APHA may repay in either cash or shares, at $APHA’s discretion.

There’s a clause that Note holders can essentially ‘force’ $APHA to repurchase all of the notes (plus accrued interest) for cash if there is a ‘fundamental change’ in $APHA’s business. I’d assumed this may include something like the proposed acquisition, but in checking this with $APHA, they advise that the ‘fundamental change’ provision relates to risk that of any potential shares exchanged under the notes won’t be able to be traded. The equity remains on NASDAQ, so, this clause has not triggered.

$APHA also advised that there isn’t $300MM anymore – it’s down to $260MM…..due to a refinancing executed back in May 2020, where some of the notes were converted during a re-financing. There’s also reference to a ‘make-whole’ provision, where $APHA can alter the conversion price under certain tax circumstances, but, that’s not in play either.

Relevant though, is that the acquisition has triggered that $9.38 USD strike provision – and those note holders are now in-the money (as of today) by some $3USD per share (APHA @ $16CAD ~= $12.59USD -$9.38USD).

Ok, so I’ve laid out that some creditors who have been waiting to see daylight for awhile – have hit a payday. Not terrible helpful unto itself. There are more convertibles – which under the mechanics of the acquisition – will see a whack of optionality crystallize. There is a ton of moving parts on $TLRY’s side as well, and it could take weeks for me to try and lay it all out.

The spread looks funky economically, yet, there is stands proudly, right in the middle of the room.

I want to emphasize to the reader that conditions like this implies ‘something’ is up. Often, it’s a market hiccup or temporary situation. That’s not the case here, and the magnitude of the spread cannot be ignored. And while I’ve got 20 guesses about it, I am at a complete loss to prove any of them. As to spending the time to try and piece it all together, with no guarantee of even finding a driver then, well.

Theres a skew in ultimate ownership percentages of the companies when they finally come together. But, they’ll be singular by then. Such is where one looks in trying to divine a situation that doesn’t make a lot of sense.

A dedicated analyst with 2 years living and breathing this company would stand a chance. But I’ve hit targets, and have been reducing my Canadian cannabis investment portfolio exposure opportunistically, and increasing trading within the same to exploit recent volatility. Trading has been good to me this month.

I am reminded of a quote from a Mel Gibson movie (Payback), where a gangster is talking about the hero, who seems to have no motivation for what they’re doing. The character says: “If you don’t understand something, get rid of it.”

I couldn’t agree more.

The preceding is the opinion of the author, and is in no way intended to be a recommendation to buy or sell any security or derivative. The author holds no position in $APHA.