MARIJUANA MEGADEAL
Aurora acquires MedReleaf
Aurora Cannabis Inc., the hungriest M&A player in the Canadian marijuana space, continued its shopping spree on Monday, announcing plans to acquire rival MedReleaf Corp. for an estimated $3.2 billion, all in stock.
The deal, which is expected to close in August, will unite the second- and fourth-largest Canadian marijuana companies by market capitalization, creating a potential rival to industry leader Canopy Growth Corp. in terms of geographic reach, product offerings and production capacity. The combined market cap of both companies stood at $7.02 billion at Monday’s close, compared to Canopy’s $6.45 billion.
“It gives us a footprint in Ontario — it prepares us properly for the adult usage market. The strains that MedReleaf has managed to grow are the leading strains in this country, arguably in the world,” said Terry Booth, Aurora’s chief executive.
MedReleaf shareholders will receive 3.575 Aurora shares for each MedReleaf share they own. That implies a price of $29.44, and a premium for MedReleaf shareholders of around 34 per cent, based on the 20-day weighted average for both companies’ shares. After the deal closes, MedReleaf shareholders will control roughly 39 per cent of the combined company.
“Certainly the board of MedReleaf had a fiduciary duty to seek to maximize shareholder value,” said MedReleaf chief executive Neil Closner on a call with analysts on Monday, hinting that his company had spoken with other potential bidders. “But we’re sitting here today because we felt that this would be a transaction that afforded our shareholders the best value, both short-term and long-term.”
The friendly transaction, supported by MedReleaf’s board of directors, stands in contrast to Aurora’s recent acquisition of CanniMed Therapeutics Inc., a months-long hostile bid that involved legal wrangling and executives badmouthing one another. That deal, initially priced at over $1 billion, was the largest acquisition in Canadian cannabis space prior to the MedReleaf deal.
Although, two-thirds of MedReleaf shareholders still need to vote in favour of Monday’s deal, shareholders controlling 56 per cent of the company’s shares have already signed lock-up agreements supporting the merger, suggesting there’s little risk that the deal will not get done.
MedReleaf, which has cultivation facilities in Markham and Bradford, both in Ontario, and plans to convert a 1 million square foot greenhouse in Exeter, Ont., gives Aurora exposure to what’s expected to be the largest provincial recreational market once adultuse is legalized later this year.
Aurora, by contrast, has focused on facilities in Alberta — including an 800,000-square-foot facility under construction in Edmonton, and a 1.2- million-square-foot facility planned for Medicine Hat — and to a smaller extent, in Quebec.
MedReleaf also gives Aurora three recreational brands — San Rafael ’71, AltaVie, and Woodstock — along with the additional growing capacity needed to get product on shelves on day one of recreational legalization. That’s not, however, the main reason for acquisition, according to Cam Battley, Aurora’s chief corporate officer.
“Our eyes are on the global market,” said Battley. “The scale of the global medical cannabis market dwarfs everything that we’ll ever be able to achieve in Canada.”
Both companies have a presence in Australia and Germany, and Aurora is currently building a facility in Denmark that it hopes to use to supply the European Union. Here MedReleaf ’s focus on developing medical grade products could prove important.
“This is truly a pharma play,” said Booth. “MedReleaf ’s science teams, they are better than Aurora’s.”
Aurora is not, however, pivoting away from the recreational market. Last week the company announced that it had increased its stake in Alberta-based liquor store chain Liquor Stores NA, recently renamed Alcanna Inc., to 25 per cent. Alcanna gives Aurora a vertically integrated path to recreational consumers in the Western provinces that will allow private cannabis retail.
With all the M&A activity, however, at least one analyst is expressing concern.
“The pace of acquisitions at Aurora is extremely fast, as the company has just recently started to integrate CanniMed,” Martin Landry, an analyst with GMP Securities L.P., wrote in a note to clients. “We believe that the integration of another major acquisition in such a short time frame could be challenging, putting a strain on management and a distraction on the daily operations.”
Not so, at least according to Booth.
“We’re not going to be doing a lot of changes at MedReleaf. Why would we? They’ve got wonderful facilities and great people, there’s not a lot to fix there, it’s just a matter of back-end integration first, and then look after the rest,” he said.
Aurora stock dropped 2.11 per cent on Monday closing at $7.90. MedReleaf gained 1.45 per cent, closing at $25.26.