Is Tilray Brands preparing for a major acquisition in the US?

There is growing optimism that the U.S. government may soon enact marijuana reform that could lead to the eventual legalization of marijuana. No one knows if or when legalization will happen, but given that the government intends to change the timeline for replacing cannabis from a Schedule I substance to a less serious Schedule III substance in the near future, investors and analysts alike are optimistic that it may This will be a step towards the right direction.

One company that is particularly optimistic about these changes is Brand Tilray (TLRY 1.60%). Although it cannot enter the US market without jeopardizing its position in the US market Nasdaq Today we can hope that this may change in the future.

Acquisitions have played a key part of the company’s strategy in the past, and Tilray recently made a move that could pave the way for another deal in the future. This time it may be an acquisition related to long-term growth prospects on the American marijuana market.

Tilray Announces $250 Million Offering

On May 17, Tilray announced that it had filed a prospectus supplement and planned to raise up to $250 million through an at-market offering. The stock offering itself isn’t terribly surprising, especially for a company like Tilray that is unprofitable and may need cash to keep its business growing. It suffered a net loss of just under $352 million over the last 12 months. But what stands out is this reason for the offering and what Tilray plans to do with the money.

Tilray says it intends to use the proceeds of the offering “to fund strategic and incremental acquisitions or investments in businesses, including potential acquisitions of assets in the U.S. and abroad, to capitalize on anticipated regulatory advancements or expansion opportunities.”

While companies often use vague language in offers suggesting the money could be used for general corporate purposes, Tilray went so far as to clearly state that it does not expect to use it for such purposes. The cash taken from this offering appears to be primarily used to finance acquisitions.

A takeover involving an American company may not be imminent

Valuations in the cannabis industry have been declining in recent years, and this $250 million could go much further than in previous years. From 2021 AdvisorShare Pure US Cannabis ETF it lost almost 80% of its value. Tilray has the potential to find good acquisitions regardless of which market it chooses to look for deals in.

The problem, however, is that even if Tilray finds the right company to acquire, it may still not be able to complete the acquisition at a later date. Due to federal marijuana prohibition in the U.S., Tilray technically couldn’t acquire the company without running afoul of the Nasdaq stock exchange. Even if marijuana is reclassified as a less dangerous substance, it will not change the ban on its use. And although Tilray could use some complex maneuver like its rival Canopy growthcreating another entity and placing all American assets in it, has not at this stage shown any interest in implementing such a complex structure in its operations.

The company could invest in other U.S. companies that are not directly involved in cannabis plant-touching operations. However, any deal struck with an actual marijuana producer will likely remain unapproved, potentially for years, until marijuana becomes legal at the federal level in the U.S. — and there is no guarantee when (or if) that will happen.

Tilray investors shouldn’t set their expectations too high

Tilray looking for acquisitions is nothing new for the company. Earlier this year, he hinted that he would go into acquisition mode to help grow his business. However, investors should not forget that this company has also found quite risky partners in the past. Last year it acquired Hexo, a struggling Canadian marijuana producer, and was optimistic about the acquisition’s potential MedMen Enterprisesa multi-state marijuana operator that recently filed for bankruptcy and is today essentially worthless.

Regardless of whether the deal goes through or not, investors should not buy shares on this news. Legalization in the U.S. may still be years away, and simply pursuing more acquisitions could result in greater share dilution and a lower share price. Until the company actually demonstrates that it is on a realistic path to profitability, investors may be better off avoiding Tilray Brands.