So, a quick recap. A good place to start is this Bloomberg video
$8.2M sales, $1.6B market cap: Aurora Cannabis investors bet big
We look at the latest earnings for Aurora Cannabis with Cam Battley, executive vice president. He tells us what is behind the company’s surge in revenue for the quarter and also gives us an update on Aurora Cannabis’ expansion in Edmonton.
First we had the CanniMed Therapeutics Inc. acquisition for $1.2-billion in January
Seeking Alpha has a simple but insightful analysis
Summary
Aurora acquired CanniMed after months of pursuing.
Aurora’s revised bid was more than 80% than original offer.
Deal was expensive, but Aurora needed CanniMed to win upcoming provincial supply agreements.
Flawless execution in the coming months critical to prove deal worthwhile.
Aurora Cannabis (OTCQX:ACBFF) announced the acquisition of CanniMed Therapeutics (OTC:CMMDF) last week after months of pursuing and suing each other. After the C$1.1 billion acquisition, biggest deal yet in Canada’s marijuana sector, Aurora has officially become the largest cannabis company in Canada and around the world by market capitalization, passing Canopy (OTCPK:TWMJF) in the process. The battle between Aurora and Canopy started when Aurora began its acquisition spree buying up everything Cannabis-related including greenhouse contractor Larssen, hemp products distributor Hempco (OTC:HMPPF), cannabis vaporizers e-commerce supplier Namaste (OTCQB:NXTTF), and Australian license holder Cann Group (OTCPK:CNGGF). Shareholders of Aurora has enjoyed a much better lift than Canopy shareholders in the last year, with Aurora rising above 400% in the last 12 months while Canopy shares went up 200%, still impressive returns for any sector.
Hefty Price
Aurora definitely had to pay up for CanniMed. Unusual in corporate M&A would a buyer raise its initial purchase price by as much as 50%. Aurora initially offered CanniMed shareholders C$24 a share but soon realized that it won’t cut it unless the company is willing to pay up. The pot sector was undergoing a frenetic rally that saw shares of all cannabis-related companies soaring to new heights on a daily basis. Eventually, the friendly deal was struck on January 24, 2018, with Aurora agreeing to pay an amount of around $43 per share based on an implied Aurora share price of $12.65 and a 3.40 exchange ratio on the day of the announcement.
And now the MedReleaf deal that’s bringing silly numbers into the game
The Globe and mail has taken a harder look at the deal than most others.
They write..
Aurora Cannabis is chasing billion-dollar deals. Do investors benefit?
During a news conference to unveil his signature deal, the chief executive of Aurora Cannabis Inc. was hailed as a “pioneer and visionary” by his executive team.
Yet, when he was asked a simple question by an analyst, to explain which metrics he used to value his $3.2-billion takeover of MedReleaf Corp., Terry Booth got a little tripped up.
“Metrics …” he said, trailing off. After an awkward silence, he conjured up half an answer. “That’s our secret.”
The exchange was an emblem for an entire sector. Canada’s cannabis companies have seen their valuations soar over the past six months as legalization nears, but most are still losing money – and their revenue projections are all over the map. It is nearly impossible to know whether these companies will live up to their hype.
Related: Aurora Cannabis to buy MedReleaf for $3.2-billion as sector consolidation looms
Marijuana legalization: How Canada is planning on regulating recreational cannabis
Until recently, this was mostly a problem for investors. Lately, though, executive teams have also wrestled with it, because these companies are starting to buy one another at an astonishing pace. As seen so many times in the junior mining and energy sectors, we have entered the consolidation phase, in which companies scramble for scale, hoping to be one of the few standing when the music stops.
So far, Aurora has been the most aggressive buyer, with two billion-dollar deals this year. Investors didn’t fret too much when it bought CanniMed Therapeutics Inc. for $1.2-billion in January, even though the target’s valuation was hard to justify, but now that Mr. Booth is leaping at a deal almost three times that size, they ought to ask how any prospective takeover target is valued in a sector that’s so bloated.
When pressed on this front, Mr. Booth said he couldn’t divulge much because the valuation technique was his “secret sauce.” And when chief commercial officer Cam Battley was asked for cost savings from the merger, he didn’t have much to say, either. “We don’t have an exact calculation of the synergies,” he said. All he could offer was that the company’s chief financial officer and his team did the work, “and they all came out of that exercise with big smiles.”
Aurora’s financial adviser, BMO Nesbitt Burns, declined to comment for this story.
Like so many junior commodity companies before it, Aurora would much rather sell investors a story. Instead of worrying about recent revenues and profit, the company wants everyone to know how big it will be when merged with MedReleaf. The two will have a combined market value of $7.4-billion. As well, Aurora emphasized the merged company’s production capacity, which could reach 570,000 kilograms of cannabis a year in a perfect scenario.
The company also has a new narrative to sell. Because Canada’s prospects are limited by its population, Aurora is now out for global domination – and the merger is supposed to provide extra production, allowing Aurora to sell more marijuana abroad, particularly in Europe. The growth, you see, never ends.
A quick peek at Aurora’s financials will be a bit of a buzzkill for anyone who buys this hype. The company reported its latest results last week and it lost $10-million in operating cash flow during the quarter – “the worst performance of all companies under coverage,” GMP Securities analyst Martin Landry wrote in a note to clients. Yet Aurora traded at 28 times his projections for earnings before interest, taxes, depreciation and amortization – a 60-per-cent premium relative to its peers.
As for the European growth story, it’s still in its infancy. Germany is the key market because of its size and recent acceptance of medical marijuana, but the country’s courts keep dragging out the approval process for new producers.
No doubt the proposed MedReleaf merger has real merits, particularly because the target is known for being one of the more respected players in the sector, with a solid management team and hardly any debt. (Although there were no guarantees that MedReleaf’s team will stick around if it closes.)
Aurora is also paying for MedReleaf with its inflated paper – that is, its overvalued shares. In other words, it isn’t using leverage.
But, Aurora is paying a 34-per-cent premium, after already coughing up a healthy premium for CanniMed. It also said Monday that it is on the hunt for even more deals.
The more premiums Aurora pays, the more existing shareholders will be diluted. At some point, they will start to wonder what they own, and how much of it – which will be all the more troubling if the production and profit promises aren’t met for some time.
For more market friendly hype read this Bloomberg piece
Two Canadian Companies Are Merging in the Biggest Weed Deal Ever
Consolidation in Canada’s nascent marijuana industry is heating up, with two of the largest players agreeing to the biggest merger seen so far in the sector.
Aurora Cannabis Inc. agreed to buy rival MedReleaf Corp. for about C$2.9 billion ($2.2 billion) in stock, the companies said Monday in a statement. The deal will create a producer with the capacity to grow 570,000 kilos (1.26 million pounds) a year of cannabis at nine facilities in Canada and two in Denmark. The merged company will also have distribution networks at home as well as in Europe, South America and Australia.
Canadian marijuana growers are racing to gain market share as Prime Minister Justin Trudeau pushes to legalizerecreational use this year. Aurora is leading the effort to consolidate the industry, having acquired more than 10 targets in the past two years.
Aurora Chief Executive Officer Terry Booth said there will be more consolidation in the industry.
Read more at the link above
Following are Aurora’s bullet points on why they believe they are worth over a $Billion
- Industry leading scale: the Transaction brings together two leading operators with a total funded capacity of over 570,000 kg per year of high-quality cannabis, through nine facilities in Canada and two in Denmark.
- Low production costs and industry leading yields: Aurora’s automated greenhouses are expected to deliver industry-leading efficiency and low production costs, delivering sustainably robust margins. MedReleaf’s high-yield cultivation is expected to further enhance productivity and reduce costs across the combined entity’s facilities.
- Extensive distribution channels in Canada and internationally: the two companies have established distribution agreements with Alberta’s Alcanna (formerly Liquor Stores), Quebec’s SAQ, Pharmasave and Shoppers Drug Mart in Canada, among others. Additionally, the companies have a rapidly growing international footprint through a network of in-country sales and distribution capabilities and supply and licensing agreements on five continents, including countries such as Germany, Italy, Brazil and Australia. Both companies are actively engaged in initiatives to further expand their international activities.
- Proven execution and agility across the value chain: creating a combined company, fully integrated across the entire value chain. The combined entity will be enabled to move with more agility and speed to capitalize on diversified opportunities in both the domestic and international markets, and create new, higher-margin opportunities across the value chain.
- Enhanced diversification: a more broadly diversified portfolio of award-winning high-quality flower and derivative products will enable the companies to establish strong brands across the various market segments.
- Brand leadership: three established medical brands, Aurora, CanniMed and MedReleaf, coupled with a portfolio of consumer and wellness brands – San Rafael ’71, Woodstock, and AltaVie – all backed by detailed consumer and marketplace insights and advanced analytical frameworks.
- Innovation and R&D excellence: the expanded scientific team will focus on developing a robust pipeline of marketable IP, accessing higher-margin segments and new revenue streams. Aurora’s Medical Centre of Excellence, formed through the combination of the Aurora and CanniMed science and product development teams, together with MedReleaf’s ongoing studies with recognized research institutes, are expected to continue to evolve product innovation and create additional momentum for brand equity development on a global scale.
- Enhanced capital markets profile: the combined entity’s expanded capital markets profile is expected to appeal to a broader shareholder audience, enhance trading liquidity and increase weighting in index tracking portfolios.
We also note they’ve been doing a number of quiet deals internationally now they have a distribution network set up. A great example is their “move” into Australia.
Here’s the press release dated 28 March 2018.
We buttonholed their GC, Jillian Swainson, after the final presentation (International) at the MJ Biz NEXT, NCBA Sessions and we have to say she was a little cagey about their plans down under.
Aurora Cannabis to be Cornerstone Investor in Australian Medical Cannabis IPO
Acquiring 19.9% Stake in Cann Group Limited
Australia’s First Medical Cannabis Licensed Producer
TSXV: ACB
VANCOUVER, March 28, 2017 /CNW/ – Aurora Cannabis Inc. (the “Company” or “Aurora”) (TSXV: ACB) (OTCQB: ACBFF) (Frankfurt: 21P; WKN: A1C4WM) is pleased to announce that it has committed to taking part in the initial public offering (“IPO”) of Cann Group Limited (“Cann Group”) on the Australian Stock Exchange (“ASX”) as the cornerstone investor, securing a 19.9% stake in Cann Group, the first company in Australia ever to be licenced for research and cultivation of medical cannabis for human use.
The joint lead manager and underwriters to the offer are Canaccord Genuity (Australia) Limited and PAC Partners Pty Ltd. Under the terms of the subscription agreement Aurora has committed to subscribe for 21,562,314 ‘new fully paid ordinary shares’ in Cann Group at the IPO offer price per share of AUD $0.30. Aurora’s total investment of AUD $6.5M (approximately CAD $6.6M) represents 47% of the AUD $13.5M offer. Following completion of the IPO expected in May, 2017, Aurora will hold 19.9% of the fully paid ordinary shares in Cann Group.
The Commonwealth government in Australia amended its Narcotic Drugs Bill in February 2016 to legislate medical cannabis to provide an Australian supply and to encourage pathways to clinical trials. Cann Group seeks to become a leading producer and supplier of medicinal cannabis products to Australian patients. Cann Group is the first Australian company to be granted the necessary licences to cultivate medical cannabis for both research and human use, through its wholly owned subsidiary Cannoperations Pty Ltd.
Aurora’s Chief Global Business Development Officer, Neil Belot said, “Cann Group’s first mover advantage in Australia is a testament to their team’s experience and ability to execute their business strategy. This historic IPO is an excellent opportunity for Aurora to establish a meaningful relationship with Australia’s first licensed medical cannabis producer under the new legislation.”
“We believe that there is potential for Australia to become a leading market for medical cannabis research, innovation, investment and commercialization, given the country’s regulatory framework, its entrepreneurial business environment, and the high quality of local talent,” said Terry Booth, CEO of Aurora. “The team behind Cann has a wealth of experience, and we are committed to supporting them fully, as Australia’s cannabis industry develops.”
“We are very excited about Cann Group’s market opportunity, we’re confident in our business strategy, and we look forward to welcoming Aurora to Australia,” said Peter Crock, CEO of Cann Group. “As the first company in Australia to be granted medical cannabis research and cultivation licences, we believe we have a strong future ahead of us. The enthusiasm, support and detailed insights we have received from Aurora have been incredibly helpful, and strengthen our proposition. We are poised to build on that foundation and work collaboratively to be leaders in the development of the medical cannabis industry in Australia.”
So. We’ve got a number of deals to tie up grows and distribution for the international medical cannabis market. For their sake that Canadian parliament better vote the “correct” mid year, otherwise, as the Globe & Mail point out…..At some point, they (shareholders) will start to wonder what they own, and how much of it – which will be all the more troubling if the production and profit promises aren’t met for some time..
Their aggressive growth strategy , we suggest, also relies on some serious political lobbying in Australia to remove government inertia, the courts in Germany who have applied some braking mechanisms already, the UK’s Tories to even contemplate the vaguest idea of a regulated medical cannabis market.
Nevermind the legislative chaos in the US market.
Here at CLR we think back to that hackneyed & overused phrase, “Too big to fail”.
That’s what they said about some banks that now live in dim distant memory.
