Curaleaf (TSX: CURA) is one of the larger cannabis operators available to Canadian investors. Most of the company’s operations are in the U.S., but that could shift depending on how the Curaleaf takeover bid for Aurora Cannabis (TSX: ACB) turns out.
After Aurora declined to enter negotiations, Curaleaf took its offer directly to shareholders. Earlier this month, Aurora’s board formally rejected the bid and urged investors not to tender their shares.
This leaves Aurora shareholders with a decision to make. They can either accept an offer that includes a premium but is mostly comprised of Curaleaf shares or continue to bet on Aurora’s chances to grow on its own.
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What is in the Curaleaf takeover bid?
Curaleaf is offering Aurora shareholders US$0.75 in cash and 0.3463 of a Curaleaf subordinate voting share for each Aurora share they own.
The value of that proposal works out to about US$4 per Aurora share. That works out to an approximate 45% premium on the volume-weighted average share price.
The offer also comes with a maximum value of US$5 per Aurora share, limiting how much shareholders could receive if Curaleaf’s stock rises.
By way of example, as of the time of writing, Curaleaf trades at just over $15 per share. And during the past month, the stock has risen over 14%.
The hostile offer remains open until December 1 unless Curaleaf extends, changes, or withdraws it.
Why Curaleaf stands to gain
Aurora represents something valuable and missing from Curaleaf’s existing business. Specifically, Aurora’s established international medical cannabis operation.
Aurora has a presence across several overseas markets, including Europe. It also owns cultivation and manufacturing facilities that meet European Union good manufacturing practice standards.
In theory, those assets could help to accelerate and expand Curaleaf’s own international distribution network.
Curaleaf estimates that a combined company could generate annual revenue of nearly US$1.5 billion and approximately US$350 million in adjusted earnings before interest, taxes, depreciation, and amortization. The company is also expecting to generate at least US$40 million in annual cost savings.
Aurora shareholders gain exposure to a larger cannabis company and potential regulatory improvements in the United States. That being said, they would also inherit Curaleaf’s balance sheet and its operating footprint.
Why Aurora rejected the takeover bid
Aurora’s board argues that the offer significantly undervalues the company, particularly the value of Aurora’s international medical cannabis business.
The company also believes Curaleaf is taking advantage of a depressed Aurora share price. Unlike Curaleaf, Aurora is debt-free and reported nearly US$149 million in cash as of June 30. Contrast that to Curaleaf, which has more than US$1 billion in debt.
Aurora argues that the deal would allow Curaleaf to gain control of its cash while transferring Curaleaf’s balance-sheet risks to Aurora shareholders.
Voting power is another concern. Under the proposed deal, Aurora investors would own approximately 7.7% of the combined company but only 3.2% of its voting rights due to Curaleaf’s multi-voting share structure.
The fight has now escalated to regulators. Curaleaf has asked securities regulators to stop Aurora from issuing shares through its at-the-market program. The argument is that new issuance could interfere with the bid.
Aurora responded that the filing was another attempt to pressure shareholders.
What should investors do now?
For Aurora shareholders, the decision comes down to which company makes the more convincing argument.
Accepting the offer provides some cash and ownership in a larger, more diversified cannabis company. However, that final value depends heavily on Curaleaf’s share price.
Investors are also swapping ownership in a debt-free company for one carrying significant debt.
Alternatively, rejecting the bid leaves shareholders exposed to Aurora’s ability to grow its international medical cannabis business and prove that it’s worth more than what Curaleaf offered.
Curaleaf could still increase or revise its offer before December. Until then, Aurora shareholders are left to choose between two very different cannabis investments.
