Tilray shares surged more than 13% Monday in premarket trade after the Canadian pot company announced it struck a deal with its majority shareholder, a cannabis company backed by venture capitalist Peter Thiel, to sell the fund's stake gradually over the next two years.
Privateer Holdings, a private equity fund concentrated in the cannabis sector, formed Tilray in 2013 and took it public last summer. Thiel's Founders Fund was an early backer of Privateer in 2014.
Privateer holds 77% — 75 million shares — of Tilray's outstanding shares worth roughly $2.91 billion at Friday's closing price of $38.80. That stake was worth more than $16.05 billion at the company's peak price of $214.06 in September.
Short sellers have bet Privateer would flood the market with Tilray shares, with 24.2% of the float currently shorted, according to FactSet. The deal sets up a schedule and conditions for Privateer's stake to be released over the next two years, which Tilray hopes will clear the stock overhang.
Tilray will acquire Privateer in a downstream merger, releasing Privateer's current stake to the market over the next two years in what is expected to be a tax-free deal for the fund's investors. In the first year following the transaction, shares will be sold to institutional and strategic investors, which Tilray will determine. Remaining shares will be released over the second year at a staggered rate.
"Privateer is giving Tilray a lot of operational flexibility and obviously believes in long-term value of this business and is not pushing to sell its shares as soon as possible, so it's kind of mutually beneficial, this transaction, for both parties," Tilray Chief Financial Officer Mark Castaneda said in an interview.
Tilray has signed numerous partnerships, including with brewing giant Anheuser-Busch InBev, retail and consumer brands conglomerate Authentic Brands Group and pharmaceutical company Novartis. Some of its competitors have taken large investments from strategic investors. Alcohol company Constellation Brands purchased a 38% stake in Canopy Growth last year, while tobacco giant Altria bought 45% of Cronos.
"Tilray and the cannabis industry is disrupting many industries, and there is a lot of long-term interest from really all those industries — pharmaceutical, alcohol, (consumer packaged goods) and tobacco — of investing into this space on a long-term basis," Castaneda said. He said he does not expect all 75 million shares to be sold.
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Correction: This story was revised to correct that Privateer's current stake will be offered to the market over the next two years in what is expected to be a tax-free deal for its investors.