Shares of Tilray Brands Inc. experienced a substantial surge on Tuesday following the announcement of its acquisition of eight beer and beverage brands from Anheuser-Busch InBev, the parent company of Budweiser. This move has garnered mixed reactions from Wall Street analysts.

Boosting Cash Flow and Expanding Distribution Network

Analysts believe that this deal will not only inject much-needed capital into Tilray's operations but also expand its distribution network for both alcoholic beverages and cannabis. Once cannabis becomes federally legalized in the U.S., Tilray's distribution network will be well-positioned to capture market share in the industry. In addition to alcohol, Tilray will gain ownership of reputable brands like Shock Top and Red Hook, potentially generating higher revenue from alcohol sales compared to its cannabis business.

Concerns Surrounding Declining Beverage Sales

However, one analyst expressed concerns regarding the declining sales of the beverages being acquired. These sales have been decreasing since last year, reflecting a broader decline in craft beer sales volumes. The craft beer market has faced mounting competition from non-beer alternatives over the years.

Impact of the COVID-19 Pandemic

The decline in craft beer sales is attributed to factors such as the COVID-19 pandemic, which heavily impacted the on-premise sector comprising bars and restaurants. Vivien Azer, a TD Cowen analyst, acknowledged this impact and stated, "Craft beer volumes declined 6% in 2021 and 9% in 2022." The purchased portfolio of beer and beverage brands has also witnessed dollar sales declines of 6.4% year to date and -8.5% in 2022, according to data from Nielsen.

Positive Stock Surge Despite Challenges

Despite concerns surrounding declining beverage sales and the challenges faced by Canadian weed companies, Tilray's stock witnessed a significant surge of 31.5% on Tuesday following the news of the acquisition. This boost has contributed to a year-to-date increase of 5.8%. However, over the past 12 months, the stock has experienced a decline of 23.4%, reflecting the ongoing struggles and competition within the Canadian cannabis industry and the stalled federal reform efforts in the U.S.

Tilray Acquires Beverage Brands from AB InBev

Tilray, a prominent player in Canada's cannabis industry, announced its plans to purchase several renowned beverage brands from AB InBev for $85 million. The deal, set to be finalized this year, will involve the acquisition of Shock Top, Breckenridge Brewery, Blue Point Brewing Co., 10 Barrel Brewing Co., Redhook Brewery, Widmer Brothers Brewing, Square Mile Cider Co., and HiBall Energy.

The payment for the acquisition will be made in cash. Additionally, the agreement includes the retention of the current employees, breweries, and brewpubs associated with these beverage makers. As a result of this deal, Tilray is set to gain four production facilities: two in Oregon and one each in Colorado and New York. This expanded manufacturing capacity is a significant asset for the company's growth.

While the cannabis industry in Canada has faced challenges in meeting its financial targets since the country legalized recreational use in 2018, Tilray is optimistic about the potential of this acquisition. The company projects that the craft beer segment from these acquired brands will generate revenue of approximately $250 million. This anticipated revenue would surpass Tilray's sales of $220 million from cannabis in the previous fiscal year.

During a call with Wall Street analysts, Tilray's Chief Executive, Irwin Simon, highlighted the strategic value of this acquisition. Simon emphasized how the addition of these eight beverage brands will complement Tilray's existing craft-beer business and bolster its distribution infrastructure. Furthermore, this deal will enable Tilray to enter new markets that were previously inaccessible with its current beverage portfolio.

Simon also noted that once federal cannabis legalization occurs, Tilray will further expand its beverage and wellness portfolio to include THC-based products. This forward-thinking approach positions Tilray to tap into emerging opportunities as legislation evolves.

Andrew Carter, an analyst at Stifel, has expressed optimism regarding the acquisition. Carter views this transaction as a strategic move by Tilray to enhance its consumer packaged goods business in the United States. He believes it represents a prudent use of capital and a diversification of Tilray's portfolio, ultimately enabling the company to capitalize on the vast potential of the U.S. cannabis market.

In summary, Tilray's acquisition of these beverage brands marks a significant milestone for the company. With an expanded presence in various states across the United States, Tilray is poised to leverage its enhanced infrastructure and brands to seize opportunities within the thriving cannabis market.