Aurora Cannabis Inc. (TSX:ACB) made waves with its $1 billion acquisition of CanniMed Therapeutics. When the deal closed, Aurora stock shot up to an all-time high of $15.20 in late January, but it has almost halved in value since then. Cannabis stocks have been hit hard in the aftermath of a broader stock market retreat that was sparked in late January and early February.
Shares of Aurora have dropped 30% over a three-month span as of close on May 4. The stock is down 16.3% in 2018 thus far. The company has made a number of encouraging moves in the late winter and early spring, but it has failed to spur the kind of momentum in its stock that investors saw in late 2017 and early this year.
On May 2, reports surfaced that Aurora was in talks with MedReleaf Corp. (TSX:LEAF), a Markham-based producer. MedReleaf has also reportedly been in talks with other major producers in the Canadian market. Its stock rose 4.67% on May 4.
Currently, MedReleaf has a market share around $2.2 billion, with Aurora sporting more than double its size. A deal would represent yet another consolidation ahead of recreational legalization that is fast approaching and expected in the late summer or early fall. There has also been a scare that Conservative senators could spearhead an effort to delay cannabis legislation for months.
Other suitors reportedly include Canopy Growth Corp. and Aphria Inc. Aurora has shown a willingness to pay at a premium — case in point is its recent acquisition of CanniMed. The news comes after MedReleaf stock experienced a massive surge over the past month. Shares are up 51% month over month as of close on May 4. This may explain the rationale behind a sale at this time. But should this be concerning for investors?
The acquisition of CanniMed resulted in some pointed criticism earlier this year. Aurora has yet to establish the kind of revenue stream that comes close to justifying its valuation, even with the promise that recreational legalization carries. Paying a premium for MedReleaf after its recent rally with so much uncertainty ahead of legalization may be cause for concern.
There is another factor that makes Aurora a risky bet today.
Should investors be worried about a potential delay?
In a press conference, Prime Minister Justin Trudeau vowed that his government intended to carry out its promise for recreational legalization to pass through this year. The most recent pushback is coming from Liberal senator Lillian Dyck, chair of the Senate’s Aboriginal Peoples committee. Dyck has said that a delay is warranted as aboriginal communities have not been adequately consulted.
Real estate broker lobbyists have also argued for a delay to account for the change in building codes required for home growers.
A substantial delay would represent a huge setback for the Trudeau government and a potential political catastrophe ahead of an election season in 2019. The ruling Liberals are unquestionably aware of this, which would explain Trudeau’s prompt pushback against the suggestion of a delay. The senate is set to hold a third reading on the vote on or before June 7.
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Fool contributor Ambrose O'Callaghan has no position in any of the stocks mentioned.