Stifel analyst Andrew Carter has downgraded Aphria (NASDAQ: APHA) from Buy to Hold and upgraded Tilray (NASDAQ: TLRY) from Sell to Hold following the announcement of the company’s merger. He said that the merger with Tilray offers compelling long-term potential but limited near-term upside. He raised the target price from C$8.25 to C$9.90 for Aphria based on the company’s 62% of the new combined company.

“We are taking a positive approach to this merger given the long-term potential. But pursuing this merger attracts scrutiny,” he wrote in his note. “Aphria has successfully achieved a leadership position in the Canadian adult-use market organically, and we question the opportunity cost of capital/management bandwidth for undertaking this acquisition. We believe the shares are likely to remain in a holding pattern over the near-term as investors gain confidence with the combined platform’s long-term potential. Against the incremental contribution, we are reducing our revenue estimates for the distribution business assuming the 1Q21 run-rate of C$82 million as the appropriate run-rate going forward. With our outlook suggesting discount will be a more fulsome percentage of sales, our estimates consider a higher level of excise taxes pressuring both net sales and EBITDA.”

Tilray’s price target was raised to $9.20 from $5. He wrote, “We believe Tilray offers a difficult case for standalone value creation with Tilray not showcasing, in our view, an enduring right-to-win for new market opportunities particularly in the U.S. with the increasing competitiveness of the Canadian market likely challenging the company’s ability to offer a profitable template for investors. We believe Tilray is contending with underappreciated liabilities and liquidity needs that would otherwise challenge the company’s ability to drive investor enthusiasm. But this merger provides Tilray shareholders participation in a platform offering truly impressive growth potential with the initial announcement suggesting a 23% premium to Tilray’s December 15th closing price.”

Carter believes the combined company will generate $890 million in combined 2021 net revenue with cannabis sales approaching $500 million with the combined portfolio offering mid-teens revenue growth and a combined margin profile comparing well with traditional consumer assets (~20% EBITDA margin).

“While we believe the combined platform will offer investors an impressive growth profile and a well-positioned vehicle for capitalizing on the growth of the global cannabis category, we believe the prevailing valuation fully considers the platform’s potential with the focus now on successfully completing a complex integration,” he said in his research report.