Could Aurora Cannabis Inc (TSE:ACB) (NYSE:ACB) (FRA:21P) be the next LP in line to experience the “Piper” effect? All signs point to this inevitability, which is great news for shareholders if recent moves in Canopy Growth are any indication. We explore further.
Of course, the “Piper” effect we refer to is the penchant for large U.S. investment banks—in this case, Piper Jaffray—to use their considerable influence to exert material effects on Tier-1 cannabis prices. We’ve seen this very occurrence in Canopy Growth stock twice this month: On January 9th, Canopy Growth surged 13% after Piper initiated coverage with an “Overweight” rating and $40/share price target (CGC last closed at $29.64 before coverage was initiated); and on Friday, Canopy rose another ↑9.66% after Piper raised their price target ↑50% to $60/share—just two weeks after initiating coverage.
Irrespective of the cartoonish-like ethos surrounding the call (analyst model multiple increased from 11x EV/Sales to 18x), investors lapped up the news. Friday’s gain added close to $2 billion fully-diluted market capitalization to the ranks, bringing along FOMO-like undertones with it. Canopy Growth has now risen ↑63.69% in twelve sessions since Piper Jaffray initiated coverage January 9th, giving powerful indication of the sway U.S. investment bank favor-ability can deliver.
CGC – January 9
CGC – January 25
The move has been so voracious, even venerable Mad Money host and Canopy cheerleader Jim Cramer cannot recommend buying CGC here:
— Jim Cramer (@jimcramer) January 26, 2019
That is exactly the “dilemma” other Canadian cross-listed LPs wish to emulate. The problem is—outside of select game-changing catalysts like CGC’s’ $5 billion direct-equity stake investment last summer— few catalysts can move the needle with such impact. One way is through U.S. investment bank coverage procurement, which is exactly what Aurora Cannabis is courting.
Aurora Cannabis Edges Closer To Major U.S. IB Coverage
While Canadian investment banks such as Canaccord Genuity, Eight Capital and GMP Securities provided critical nascent stage developmental support for Aurora Cannabis (they still provide analyst coverage and support), the company’s banking requirements are growing. Aurora Cannabis is not simply a primary Canadian operator anymore, as subsequent financial results will attest. Global companies require global IB’s to service corporate advisory, strategic solutions (asset sales/divestitures, spinouts, capital raising, M&A, etc.) and investment solution needs.
We’ve witnessed Aurora Cannabis “graduate” to the next investment banking tier when it announced a $250 million debt and credit facility with the Bank of Montreal last summer. That afforded investors the prestige in knowing a Canadian “Big Six” bank had done its due diligence, and affirmed the creditworthiness of Aurora’s loan ambitions. Even more notable was that BMO acted prior to adult-use legalization in Canada, and before Aurora’s operations had really scaled. It was tacit acceptance of the business model that Aurora Cannabis—along with select peers—helped to create.
Outside of that milestone event, however, few indications of more profound institutional courtship had transpired—until recently that is.
In its latest USD$250 million convertible senior notes deal, Aurora Cannabis CCO Cam Battley not only disclosed that Bank of Montreal (again) was part of the transaction, but so too was major U.S. investment bank Cowen Inc. Furthermore, many of the over-subscribed offering’s participants, it was revealed, were U.S. institutional investors. In Cam Battley’s own words:
“So let’s start with our bankers, because I really want to give them a shout-out. Our bankers were BMO, Bank of Montreal, and Cowen in the US… Now, the investors themselves, there are actually dozens of them, and it’s primarily large US Institutions, some from Europe as well, some from Canada, and that’s important as well, because these are long-term shareholders.”
This revelation comes on the heels of a frenetic institutional courtship, where top company brass reportedly met with over 100 institutions over the last couple of months. That includes the Canadian Cannabis Capital Markets conference held in Frankfurt, where prominent German investors watched Mr. Battley speak.
— Marc Davis (@mldjournalist) October 31, 2018
Clearly, Aurora Cannabis push to branch out its institutional investors base is bearing fruit. Now that Cowen and Aurora are working together, it only makes sense that official analyst coverage is on the horizon. With Cowen cannabis analyst Vivian Azer known to bandy around eye-popping price targets for its clients, there’s little reason to believe Aurora Cannabis won’t be afforded the same.
Given Aurora Cannabis’ recent U.S. investment banking connections, global institutional courtship, operational maturity and U.S. exchange listing presence, it’s just a matter of time before Aurora has its “Piper” moment (although I suspect it will be more of a “Cowen” moment). As we’ve witnessed this month with Canopy Growth, when coverage is strategically initiated at the right moment, results can be spectacular.
This isn’t a call to action to enter ACB, as the timing of U.S. analyst coverage is unpredictable. But long term investors should take solace in knowing that Canopy’s recent surges (x2) will inevitably gravitate towards their neck of the woods. I suspect that will happen sooner rather than later.
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