Aurora Cannabis is one of many Canadian marijuana companies vying for domination of the cannabis industry. With the latest polls showing huge leaps in support for legalized marijuana, in particular for medical marijuana, companies like Aurora and Canopy are trying to position themselves to solidify their positions at the top of the market.
Aurora Cannabis put in an unsolicited offer to buy CanniMed for $18.75 a share last week, which would value the merger at over $2 billion all together. In order for the purchase to happen, Aurora Cannabis has not only had to take some big risks themselves, but are also taking big risks with their shareholders\’ money.
The first thing to note is that CanniMed shareholders would be receiving a pretty fair shake if this deal were to go through. The all-share proposal on the date of the unsolicited bid represents a nearly 57% premium to the closing price of CanniMed\’s shares on Nov. 14.
Then again, the company reported $4 million in net losses through the first half of fiscal 2017, and was only marginally delivering positive earnings before interest, taxes, depreciation, and amortization (EBITDA). Presumably, as industry giants like Aurora Cannabis expand their growing capacities, CanniMed could get squeezed out of the picture, or find its market share reduced. A merger with Aurora Cannabis would allow two medical cannabis companies to join forces and potentially claim a larger share of the Canadian market.
Aurora Cannabis is in the midst of constructing the Aurora Sky project, which will be the largest and most automated grow facility in the world once complete by mid-2018. Aurora Sky is capable of more than 100,000 kilograms of annual dried cannabis production across the 800,000-square-foot facility, and it\’s likely going to play a key role in pushing all-in grow costs down significantly in the years to come.
Combining forces with CanniMed would create a company capable of 130,000 kilograms of dried cannabis production each year, and give the duo a medical patient base of around 40,000.
In Canada, bought-deal financing is a common practice for money-losing companies looking to raise capital. It involves selling common stock to underwriters at a fixed price before the release of a prospectus. While it guarantees the sale of shares and the raising of capital, it also dilutes existing shareholders by increasing the amount of shares outstanding. Between mid-2014 and Aurora\’s most recent quarter, its share count has risen by more than 2,200%, to over 375 million.
Big risks like the one Aurora Cannabis is trying to make is a common practice these days in business. However, the success of this deal may hinge on Canada\’s legalization of recreational marijuana next year, even though for right now both companies are medical marijuana producers. Do you think that this move by Aurora Cannabis was well thought-out and will pay off for investors?