(Bloomberg) -- A new giant in the fast-growing cannabis industry will be created after Tilray Inc. and Aphria Inc. agreed to combine their operations.

The all-stock deal, which combines two of the industry’s best known names, will create a new entity with an equity value of about C$4.8 billion ($3.8 billion), according to a statement and interviews with the Tilray and Aphria chief executive officers. The combined companies’ 12-month annual sales of C$874 million surpasses that of industry leaders such as Curaleaf Holdings Inc. and Canopy Growth Corp.

The new company will trade under Tilray’s ticker on the Nasdaq, and Aphria shareholders will own 62% of Tilray’s stock under the terms of the transaction, which was characterized as a “reverse acquisition of Tilray.” Aphria will pay a 23% premium to Tilray’s Dec. 15 closing price of $7.87.

“I realized that Aphria needed to expand out of Canada, and merging with Tilray was a great answer because it’s a U.S.-domiciled business with great international assets,” said Aphria Chief Executive Officer Irwin Simon, who will be chairman and CEO of the combined group.

The deal reinforces that cannabis, still seen by some as a fringe investment, is a fast-evolving sector as more U.S. states legalize the substance and an increasing number of European countries open up to its medical use. The industry has seen a flurry of deals as companies jockey for position amid rapidly changing rules. Tilray and Aphria’s combined assets represent an early step toward that goal of creating a global cannabis operation.

Tilray CEO Brendan Kennedy will become a board member of the combined company. Kennedy and Simon first met in 2018, but the financial courtship only began this year. It was carried out over texts and calls due to Covid-19 lockdowns that made face-to-face meetings difficult.

The new company will sell cannabis products across Canada and “be well positioned to pursue growth opportunities” such as medical marijuana in Germany. The companies said Tilray’s Portugal production facility will allow tariff-free access to the European Union.

Simon and Kennedy said the deal better positions them to take advantage of potential U.S federal legalization and is also built on the prospect of more legalization in Europe. Kennedy said Aphria’s two assets in Germany -- a distribution center for medical prescriptions and a cultivation facility -- were particularly attractive.

“We felt with this deal, we could not only win in Canada, but win in Europe,” he said.

Beverage Assets

A combination of beverage assets will also result. Aphria has agreed to acquire U.S. craft beer company Sweetwater Brewing Company, which makes cannabis-infused beverages, and Tilray is a partner of Anheuser-Busch InBev. The combined U.S. operations will focus on Sweetwater and Manitoba Harvest, which makes branded hemp and CBD products.

Simon said there’s an interest in using Tilray’s beverage facility in Canada to get Aphria into making drinks that contain THC, which is the active ingredient in cannabis.

“The combined company is expected to have a strong, flexible balance sheet, cash balance and access to capital giving it the ability to accelerate growth and deliver attractive returns for stockholders,” according to a joint statement.

The firms say the tie-up, which needs shareholder approval from Tilray, will reduce annual costs by about C$100 million before taxes within 24 months of completion. The agreement, which is expected to close in the second quarter of 2021, includes a right to match higher bids and a reciprocal termination fee of C$65 million under certain circumstances.

BNN Bloomberg Television earlier reported that Aphria and Tilray were in advanced talks. Shares of both companies surged in late trading on Tuesday, with Tilray jumping as much as 26% to $9.94 and Aphria rising 23% to $9.96. Through Tuesday’s close, Tilray shares have fallen 54% in 2020, while Aphria’s have risen 56%.

‘Expanded Reach’

Bloomberg Intelligence analysts Ken Shea and Gopal Srinivasan said in a research note that the combination “would offer several benefits,” including “expanded reach into international medical cannabis markets.”

The European market will grow to $359 million in 2020, up 25% from 2019, according to Brightfield Group, a cannabis consulting firm. The U.S. remains the biggest prize, however. With its widespread recreational use, it’s expected to represent 70% of the world’s $93.8 billion market by 2025, according to Euromonitor International.

Jefferies served as Aphria’s financial advisor, and Cowen was Tilray’s advisor.

©2020 Bloomberg L.P.