After a lengthy takeover battle that was full of hostility, Aurora Cannabis Inc. (TSX:ACB) finally sealed the deal with CanniMed Therapeutics Inc. (TSX:CMED) in a friendly deal worth a whopping $1.1 billion. That’s the biggest acquisition ever in Canada’s nascent marijuana industry, but I think Aurora severely overpaid to make the deal happen, and I believe it’s a huge destroyer of long-term shareholder value.
Aurora’s prior cash and stock bid, valuing CanniMed at $24 share, was turned down last November, because the deal apparently “undervalued the company.” Fast forward to today, and the entire cannabis industry has taken off, more than doubling over the course of a few months. Aurora essentially more than doubled its offer for CanniMed, implying CanniMed’s value at around $50 per share. To finance this deal, Aurora is slated to issue 72-84 million shares to go with its $140 million in cash. Talk about paying up for the right fit that you believe in!
After the deal, Aurora is no longer my top pick in the Canadian marijuana scene
In the end, Aurora got its way. Newstrike Resources Ltd. (TSXV:HIP) was the odd one out of the love triangle, and CanniMed, a major piece of the Aurora puzzle, is finally being brought in.
While this may sound like a slam dunk for Aurora, the $1.1 billion price tag should make investors queasy. Aurora is showing a lack of patience and discipline, and is no better than an investor who’s chasing red-hot momentum stocks after an exponential rally.
Shares of Aurora plunged 5.48% in the trading session following the announcement of the deal, which I believe is completely warranted considering the ridiculous price that the company had to pay to get the deal done. I think there’s plenty more downside for Aurora over the next few weeks and months, as investors realize just how expensive the deal really was.
After the vertical surge in all marijuana stocks, I would have thought Aurora would have been smart to walk away and with the intention of returning after an industry-wide correction. It appears management thinks the exponential surge will continue, since they’re opening their wallet really wide on this deal — clearly, too wide.
Simply put, the $1.1 billion CanniMed acquisition doesn’t at all consider value, and I believe Aurora is positioning itself to take a major hit on the chin once the next cannabis pullback shows its ugly head. All major cannabis producers are slated to consolidate the industry over the next few years, and I believe the ones that make the deals when the market is out of favour will be the ones to prosper over the long haul.
If you’re looking for a marijuana stock, I’d favour a company that’s inactive when it comes to major acquisitions at these levels, and instead is focusing its efforts on organic expansion opportunities, while cannabis multiples remain in bubble territory.
After the CanniMed deal, Aurora drops from my top-ranked Canadian marijuana stock to worst on my list.
Stay hungry. Stay Foolish.