Key votes loom in cannabis merger

CanniMed, Newstrike shareholders could decide fate of rival Aurora’s hostile bid

MARK RENDELL

The chief executives of two Canadian cannabis companies looking to merge in the face of a hostile takeover attempt by a larger rival are hoping two key shareholder votes in the next week could bring the saga to a close.

On Wednesday, Ontario’s Newstrike Resources Ltd., the recreational cannabis company backed by the Tragically Hip, will vote on whether to merge with Saskatchewan’s medical marijuana-focused CanniMed Ltd. Shareholders of CanniMed will vote on the same deal the following Tuesday.

The votes could also decide the fate of a hostile bid for CanniMed launched by Aurora Cannabis Inc., which is contingent on the Newstrike deal being rejected.

Both Newstrike CEO Jay Wilgar and CanniMed CEO Brent Zettl are urging shareholder support for the merger plan, which they say has been in the works since October.

The main stumbling block, however, in Wednesday’s vote could be Newstrike’s share price, which shot up from $0.64 on Jan. 2 to $2.95 on Jan. 9, before dropping back down to $1.34 by Tuesday.

“With the way the multiples work, Newstrike is now worth more than CanniMed,” said Jason Zandberg, an analyst with PI Financial Corp. “I believe it’s a 65, 35 merger, so (Newstrike shares) would be worth almost half in that transaction.”

Wilgar is hoping that his company’s shareholders look past the short-term moves in the market, which have made Newstrike investors richer but the merger with CanniMed less attractive.

“Certainly there’s been some short-term fluctuations in our share price, but we don’t make long-term strategic decisions based on a few days of trading,” said Wilgar, adding that CanniMed’s share price has been “somewhat artificially constrained” by the Aurora bid.

The idea that CanniMed shares are trading below where they should be was echoed by Zettl, who claims his company’s shares would be trading at between $45 and $75 if they weren’t “anchored by Aurora’s bid.”

Zandberg, however, questioned CanniMed’s optimistic valuations.

“(CanniMed) haven’t performed as well as Aurora has, but they hadn’t performed as well as Aurora had before the bid happened,” he said.

Even if Newstrike shareholders do vote in favour of the merger, the deal faces another hurdle next Tuesday, when CanniMed shareholders vote on the deal — a vote that’s happening against the backdrop of Aurora’s bid for CanniMed.

Aurora has been trying to acquire the company since November, when it began communicating with a major CanniMed shareholder. In mid-November, Aurora made its bid known to CanniMed, having entered lock-up agreements worth around 38 per cent of the company at $24 a share.

The ensuing two months have been anything but friendly, with CanniMed trying, unsuccessfully, to prevent Aurora from buying more shares on the open market and launching a $725-million lawsuit against Aurora and a number of CanniMed’s own investors alleging conspiracy. Still, Aurora persisted, and is urging CanniMed shareholders to reject the Newstrike deal on Tuesday.

“Our offer to make CanniMed part of Aurora is contingent on the Newstrike deal being voted down,” said Aurora’s chief corporate officer Cam Battley, who said he is confident that CanniMed shareholders will vote against the Newstrike deal and eventually support the Aurora offer, which expires March 9.

A no vote from CanniMed shareholders would end Zettl and Wilgar’s hopes for the Newstrike deal.

But that wouldn’t necessarily mean that the Aurora takeover will succeed, according to Zandberg. Again, the issue is the surge in cannabis share prices over the past month, which has brought CanniMed’s share price above the $24 that was offered by Aurora.

“We’re losing faith that (the CanniMed and Aurora) transaction is going to go through,” Zandberg said. “It really has nothing to do with the fact that this isn’t the right thing for CanniMed shareholders. But because we’ve had this rally, and prices have moved up... Aurora would have to remove their (offer price) cap.”

Our offer to make CanniMed part of Aurora is contingent on the Newstrike deal being voted down.