Debra Borchardt
After denying rumors last week about a potential acquisition, Aurora Cannabis (ACBFF) announced that it was entering an agreement to acquire MedReleaf (MEDFF) in a deal valued at C$3.2 billion. The acquisition brings together two leading producers in Canada’s medical marijuana community enabling them to deliver a capacity of over 570,000 kg of cannabis a year.
MedReleaf is known for its ability to reduce the cash cost per gram while still delivering a premium product, Aurora is equally known for its automated greenhouses and low production costs. Both companies have focused on creating extensive distribution channels and setting up international contracts.
Sean Stiefel, Portfolio Manager and CIO of Navy Capital, said, “The risk to the Aurora story was their ability to grow high-quality flower. MedReleaf is one of the most confident growers, we put them right up there with Organigram. They are universally regarded as having the best flower in Canada.” Steifel said that Aurora really needed to do this deal.
According to a company statement, MedReleaf shareholders will get 3.575 common shares of Aurora for each share they own of MedReleaf. The statement read, “Upon completion of the transaction, existing Aurora and MedReleaf shareholders would own approximately 61% and 39% of the pro forma company, respectively, on a fully diluted basis. The Exchange Ratio implies a price of C$29.44 per MedReleaf common share and a premium of approximately 34%, based on the 20-day volume weighted average prices of Aurora and MedReleaf common shares on the Toronto Stock Exchange as of May 11, 2018 .”
The is the second big-name acquisition in which Aurora has paid a premium. Shares of MedReleaf closed at C$24.90 on the TSE as of last Friday as the stock popped almost 8% on the rumors. Also last week, Aurora reported its earnings and despite the increase in revenue, losses for the company were quite high. Aurora delivered a net loss of $20.8 million. The quarterly loss was largely attributed to share-based payments and the costs associated with acquiring CanniMed Therapeutics. Aurora ended up paying a premium for CanniMed as the hostile takeover caused the price of the acquisition to rise.
“They view their stock as a currency right now in a race for growth,” said Stiefel, who has the biggest US-based Long/Short Global equities fund focusing on the cannabis industry. “The deal was done on friendly terms and it was an all-stock deal. Their biggest risk factor was the ability to grow at scale a high-quality product. Aurora needed to do something because the market was concerned about the progress of their new facilities.” He added. “They are also picking up one of the most capable CEO’s in the sector in Neil (Neil Closner, MedRelea). I think it will set off further M&A.”
Management Comments
“This is a transformational transaction that brings together two pioneering cannabis companies, both committed to high technology, high quality, and low-cost production, to create a powerful platform for accelerated growth and success on a global scale,” said Terry Booth, CEO of Aurora. “Our complementary assets, strategic synergies, and strong market positioning will provide us with critical mass and an excellent product portfolio in preparation for the adult consumer use market in Canada. Equally, the combination strengthens our capacity to service the rapidly expanding global medical cannabis markets, and amplifies our early-mover advantage. We are very excited about the combination of our respective science and R&D teams, which will position us exceptionally well for the development of high value-added products, addressing as yet unmet needs in the medical markets, and driving continued innovation for the adult consumer use market.”
Neil Closner , CEO of MedReleaf, added, “MedReleaf was founded on the belief that by striving to be the Medical Grade Standard and bringing the highest level of quality and rigor to the cannabis industry, we would produce safe, consistent, and effective products that help improve the quality of life of our patients and, in time, provide an unrivaled experience for the adult use consumer. This, in turn, would drive growth and opportunity for our business. By combining with Aurora, an integrated producer with an exceptionally strong track record for execution, and deep domestic and international distribution capabilities, we will be ideally positioned to set the global standard for our industry at a pace that will be difficult to match.”
