Aurora Cannabis Inc (TSE:ACB) Strategic Wager: Dilute Now To Establish Strategic Preeminence
The bombshell news was released early this Monday morning. Aurora Cannabis announced they had entered into a definitive agreement to acquire all of the issued and outstanding common shares of MedReleaf in an all-share transaction valued at approximately $3.2 billion CAD on a fully diluted basis. On a market capitalization basis, this makes the combined entity the biggest pure-play cannabis company in the world, assuming the deal goes through. Previously, the two companies disclosed they were in acquisition talks earlier this month.
The deal provides a plethora of operational advantages to the combined entity.
Beyond the extra funded capacity (over 570,000 kg/year), scale, and operational synergies the deal provides, it’s all about brand leadership and distribution. MedReleaf’s medicinal product line (superior strains, softgels) is among the most recognized on the market today; and along with CanniMed’s suite of products, it provides Aurora Cannabis with three distinct, established medical brands which will gain significant market share prominence in the marketplace. No other company can match this type of lucrative, medicinal product line.
On the distribution side, the deal theoretically expands the combined entity’s footprint with Shopper’s Drug Mart and SAQ, where both companies have current deals to supply cannabis.
It also gives Aurora Cannabis more of a toehold in the lucrative German market—poised to become the largest federally regulated medical cannabis market in the world. The company is already saw revenues expand more than 200 per cent year-over-year in the second quarter, including a doubling of its patient roster. Aurora Cannabis will also gain extra leverage in Germany from MedReleaf’s existing supply agreement with Cannamedical Pharma GmbH—a leading medical cannabis distributor to pharmacies in Germany. As Canada’s first and only ISO 9001 and ICH-GMP certified cannabis producer, Aurora Cannabis guarantees itself first-in advantage into the heavy regulated pharmaceutical market, which is not an easy one to enter.
Should the deal go through, Aurora Cannabis will vault itself into a pole-position in the medical strains, distributions and Germany pharmaceutical market abroad. But at what cost? That’s the kicker in all this, as there’s no question there’s a less fortuitous downside to this equation.
Aurora Cannabis Takes Its Medicine Early
While the top-line details of the deal look fantastic, there’s bound to be lots of digestion. With a current outstanding share balance of 561,006,914, and with MedReleaf shareholders poised to receive 3.575 common shares of Aurora for each MedReleaf common share held, there’s a whole lot of dilution taking place. With 101 million MedReleaf shares outstanding, the end result will be a float somewhere north of 900 million shares o/s, not including any ancillary warrants and purchased options attached.
Such a thick-floating stock wasn’t always the norm for Aurora Cannabis.
Upon the merger between Prescient Mining Corp. and Aurora Marijuana Inc. in September 2014, the combined entity floated 60 million common shares, with 20 million performance shares held in escrow based upon Aurora reaching the 2,000 medical patient milestone. Fully diluted, investors faced the possibility of about 110 million total shares outstanding.
Fast forward to today, times have changed. With the acquisitions or strategic investments in such entities as CanvasRX, CannGroup, MicroWaste, CanniMed, Pedanios GmbH, and others, growth and leadership have come at a cost. While most leading cannabis companies have chosen to grow organically, or with smaller-scale acquisitions (Aphria’s then $670 million deal to acquire Nuuvera Inc. the exception), Aurora Cannabis has been decidedly more aggressive in staking its domain.
In fact, so aggressive that while most cannabis companies sit between 100-225 million shares outstanding, Aurora Cannabis will more than quadruple the competition before legalization even commences. There’s no other way to interpret this: Aurora has elected to use shareholder capital early to establish scale advantages it expects to pay off in the long run.
Cam Battley talks about MedReleaf acquisition rumors, recent earnings, corporate happenings and more
While shareholders may be saddled with lagging performance for the intermediate term, Aurora Cannabis has made a strategic decision which should benefit patient shareholders. That is, dilute now and stake industry-leading market position early. While the rest of the field mostly elects to grow incrementally through the judicious use of shareholder capital, Aurora Cannabis has elected to do the exact opposite; or more accurately, have combined the smaller deals with the behemoths to guarantee its seat at the table.
From my viewpoint, I love these aggressive moves. As we’ve mentioned before, first-in advantage means everything at this stage of market genesis. Sure, valuations across the board are rich—but only when looked at through the prism of last quarter’s sales. If the market grows as fast many believe it will grow once the international market comes online, the deal could look quite prescient 3-5 years down the line.
Being an industry insider with quasi-government clout is extremely valuable when the rules of engagement are being made up on the fly. The combined entity attains both the prestige and wherewithal to fulfill it supply agreements it mints across the globe.
How much that strategic preeminence in worth in dollar totals I cannot say. Very few analysts can at this stage of the growth cycle. But I’m betting it goes beyond the income statement in ways very few can perceive presently. When you’re the biggest jock in school, all the girls want to date you. Choose your own analogy, but Aurora Cannabis is surely betting on a similar dynamic.
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