Aurora Cannabis Inc.’s friendly billion-dollar deal to buy rival licensed producer CanniMed Therapeutics Inc. marks the biggest acquisition the marijuana sector has seen and puts pressure on their competitors to up their expansion antes.
The agreement, valued around $1.1 billion, comes after an acrimonious takeover battle that included a public war of words and a lawsuit filed by CanniMed against its suitor.
But after spending long days at the negotiating table since late last week, the adversaries agreed on a transaction that now includes both shares and cash — a sweeter deal than the earlier all-stock transaction offered in November.
“It probably creates an expectation that there will be more consolidation in the sector,” said Aurora’s chief corporate officer Cam Battley.
The CanniMed transaction marks the largest acquisition in this sector by far, said Russell Stanley, special situations analyst at Echelon Wealth Partners.
There is now increased pressure for the sector’s bigger players — who have all raised money amid soaring share prices recently — to scale up either organically or via acquisitions, Stanley said.
“They’ve got the currency, they’ve got the ammunition, and the market’s going to expect people to use it.”
The transaction, which is subject to customary closing conditions, is the latest in a wave of consolidation in the sector ahead of legalization for recreational use this summer.
Rival producer Aphria Inc. earlier this month announced a deal to buy B.C. based Broken Coast Cannabis Inc., a transaction valued at $230 million in cash and stock. Prior to the Aurora-CanniMed deal, the largest deal had been Canopy Growth’s 2016 friendly all-stock deal to acquire Mettrum Health Corp. valued at $430 million.
Based on an implied Aurora share price of $12.65 and an exchange ratio that would see CanniMed shareholders receive 3.4 Aurora shares or a combination of cash and shares for each CanniMed share, the companies said the new offer would amount to $43 per share, or $1.1 billion.
However, Aurora shares closed at $14.79 on the Toronto Stock Exchange on Tuesday and CanniMed shares closed at $37.51, making the offer worth currently worth about $50 per share by the time it was announced Wednesday. The value could bounce around significantly before the deal closes due to volatility in the marijuana sector.
CanniMed had argued that Aurora’s earlier all-stock offer valued at up to $24 per share for the company was too low, given the wild upward swing in marijuana stocks in recent months.
The deal gives Aurora the cannabis producer with the longest track record in the industry. CanniMed’s predecessor was the sole supplier to Health Canada before the current medical marijuana licensing regime was implemented.
CanniMed has also demonstrated success in developing and monetizing value-added products, Stanley added, noting that 57 per cent of the latest quarter’s sales came from oils rather than dried flower. These capabilities could help Aurora as cannabis companies race to develop pill-form cannabis amid growing interest in the drug’s use for medical applications.
CanniMed has more than 200 employees, while Aurora has more than 450, said Battley. Aurora does not expect to cut jobs, but rather ramp up hiring, he added.
Battley also expects Zettl to come on board for at least a transition period, and perhaps beyond that.
The deal also means CanniMed will abandon its plans to acquire the Tragically Hip-backed Newstrike Resources Ltd., whose shareholders had already voted in favour of a takeover by CanniMed.
CanniMed chief executive Brent Zettl said he was angling for a three-way deal that would include Newstrike as well.
“I think there is still some open-mindedness … It’s just that we didn’t get to a commercial agreement on that.”
CanniMed will pay a $9.5-million break fee to Newstrike as a result of its decision, though its stock tumbled as much as 25 per cent after the deal was announced.
Newstrike’s chief executive Jay Wilgar says that while the view may be that his company was “left at the altar”, this was a “mutual decision” and things have changed since its deal with CanniMed was announced.
“Newstrike has received its sales license, which is a huge step,” he said.
“We are in a very strong position right now, as a standalone.”