Aurora Cannabis Inc (OTCMKTS: ACBFF), (TSE: ACB) is one of the hottest marijuana companies on the market, and for good reason. The company has seen massive growth over the past year and has vaulted itself into marijuana stock royalty as one of the largest companies in the industry.
But following what seemed like a home run acquisition of CanniMed Therapeutics Inc (OTCMKTS: CMMDF), (TSE: CMED), the company has seen its stock price falter. The Aurora-CanniMed deal is the largest in Canada’s history, and it pushed Aurora up yet another level, but some investors are concerned about the deal. Should you be?
Before we dive into the Aurora-CanniMed deal, let’s take a look at what Aurora has been up to recently, and why so many investors are bullish on ACBFF stock.
Aurora sold CA$3.1 million worth of cannabis in November 2017, which was its best month ever. The company sold 354 kg of cannabis in Canada and Germany in that month. (“Aurora Cannabis is spiking today after selling record $3.1 million in pot in a month,” Financial Post, January 2, 2018.)
In that month, Aurora stock was valued at about $2.50 per share. Now, that same stock is worth $8.32. That mean the value has more than tripled in just a few months. Of course, this is the marijuana market we’re talking about here. These types of gains are not exactly rare in the current red-hot bull market, but that doesn’t make it any less impressive.
The company is launching itself from a mid-sized player in the industry into a true powerhouse. Combine its already massive gains with savvy business moves that the company is making (which I’ll detail below), and you’ll develop a good picture of what makes Aurora Cannabis a hot commodity.
But it’s also worth noting that it hasn’t all been sunshine, rainbows, and lollipops for the company.
The current price comes after a peak of nearly $12.00 on January 26. On February 1, the stock fell about 12%. So what precipitated such a steep drop, following month after month of impressive gains?
In order to answer that question, we have to look at the Aurora-CanniMed deal.
Why the Aurora-CanniMed Deal Dropped the ACBFF Stock Price
Normally, investors are pleased when a large company makes a strong, smart acquisition of a smaller company in order to consolidate its position in the market.
In fact, many analysts do see opportunities for consolidation in the Canadian marijuana market, especially as legalization nears in that country. With so many players jumping in early to make a buck from the momentum in the industry, it only makes sense that, as marijuana legalization in Canada approaches, the bigger companies will do all that they can to shore up their positions in the market and assert their dominance.
Chart courtesy of StockCharts.com
As such, we’ve seen a number of major deals go down in recent months. Aphria Inc (OTCMKTS: APHQF), (TSE: APH), for instance, purchased a Vancouver Island-based marijuana producer Broken Coast Cannabis in a CA$230.0-million deal.
Whereas Aphria benefited on the stock market from that acquisition—as you would expect—the fact that Aurora’s stock has taken a dive after its acquisition of CanniMed seems counterintuitive.
On face value, the Aurora-CanniMed deal has all the makings of a blockbuster: two major Canadian cannabis producers coming together in the biggest deal in the country’s history.
But you have to go deeper than that to find out why the $1.1-billion buyout rubbed investors the wrong way.
“We are very pleased to have come to terms with CanniMed on this powerful strategic combination that will establish a best-in-class cannabis company with operations across Canada and around the world,” said Terry Booth, CEO of Aurora, as reported by the CBC. (“Aurora Cannabis buys CanniMed in Canada’s biggest deal,” CBC, January 26, 2018.)
But those pleasant words mask what has otherwise been a long, drawn-out process that has left some doubting the business smarts of Aurora.
You see, rumblings of the acquisition first came about in mid-November 2017, when Aurora wanted to buy CanniMed for about CA$24.0 per share. (“CanniMed postpones shareholder vote, will hold talks with suitor Aurora Cannabis,” Financial Post, January 18, 2018.)
CanniMed believed this to be too low of a valuation. Executives on both sides began publicly spouting off at each other, with CanniMed going as far as to file a lawsuit against Aurora, claiming that it had conspired to injure the company’s economic interests.
All that changed on January 24, when the Aurora-CanniMed deal was finally sealed. But by then, the CanniMed stock price had shot up to CA$43.00 per share.
This is the biggest deal of its kind in the industry, and it instantly makes Aurora one of the biggest producers in the country.
But since the deal was announced, both companies’ stock values took dives. The problem is that many investors are concerned about how the deal went down, rather than about the deal itself.
When Aurora went after CanniMed for CA$24.0 per share and was rebuffed, I believe that many investors were interested in how Aurora would react. That the company eventually capitulated and bought CanniMed for nearly double what it had initially offered sent a poor signal to analysts.
Chart courtesy of StockCharts.com
It hardly reflects well on a company when they get into public, acrimonious negotiations (not to mention fail at a hostile takeover), only to then end up offering far more than they initially had been willing to pay in order to close the deal.
Which isn’t to say that this is necessarily a bad deal. The stock market hit may very well just be a blip on the radar, and the CanniMed acquisition could be a great move by Aurora down the line.
But, at the moment, I believe that investors are selling Aurora stock in order to make a quick buck off of the rising price in the runup to the deal, as well as the less-than-ideal way that the acquisition transpired shaking some investor confidence.
Aurora Stock Moving Forward: European Marijuana Market and the Future
Following the drop that resulted from the Aurora-CanniMed deal, you may be asking whether now is the time to jump on Aurora stock or abandon ship.
I believe that the stock price decline is not going to be permanent and that, in fact, it may present a good entry point for new investors.
My reasoning being that the Aurora-CanniMed deal, while damaging in the short-term, may prove to be a great move when Canadian marijuana legalization hits this summer.
Furthermore, Aurora is making a number of deals outside of the CanniMed acquisition that speak to a strong, long-term strategy. The larger implication of the Aurora-CanniMed deal is that it will help with Aurora’s big-picture goal of establishing a foothold in the European marijuana market. (“Canadian weed companies are staking their claim in Europe,” Vice, January 30, 2018.)
While investors may be worried over the details of the acquisition, management clearly thinks it did the right thing. “We will make that company far more money than they ever thought they were going to make. I mean that,” said Aurora CEO Terry Booth, regarding CanniMed.
CanniMed has made advances in cannabis research that align well with Aurora’s designs on the budding medical cannabis markets of Denmark, Italy, and Germany. The European marijuana market is one of the most lucrative avenues in the entire sector.
The potential size of Italy’s medical marijuana market could be “$9 billion larger than the combination of the recreational and medical markets in Canada,” said Nuuvera Inc (OTCMKTS: NUUVF), (CVE: NUU) CEO Lorne Abony.
Aurora already has a license to supply medical cannabis to the Italian government through the country’s Ministry of Defence. Medicinal marijuana was legalized in the country in 2013.
The Netherlands, due to its well-known acceptance of cannabis, was the only external source of weed to Italy, and that proved costly. Canadian companies are now going to challenge that status quo, with a lot of money to be made as a result.
Aurora’s recent moves, including the CanniMed acquisition, will help the company better expand into the Italian market.
Germany is another country that represents a juicy prospect for marijuana producers. With Germany legalizing medical marijuana in March 2017, many Canadian companies, including Aurora, are looking to provide the supply to what is certainly going to be a large demand in Europe’s most populous country.
Aurora also teamed up with a Danish tomato producer to form Aurora Nordic, which claims that it can produce up to 120,000 kg of cannabis annually to supply the Scandinavian country.
As I wrote in my newsletter, Marijuana Millionaires, I strongly believe that future long-term success in the marijuana market involves looking beyond the immediacy of Canadian marijuana legalization and focusing on the bigger picture.
That bigger picture being that more and more developed countries are opening up to marijuana, and companies that approach the industry from an international perspective are the ones set to yield long-term gains for years to come.
If you want your quick fix, your fast high, so to speak, then your options in the marijuana market are plentiful. But if you’re looking for a long-term, winning company that will be there to provide gains for years, maybe even decades, then you want to see a business that is making decisions that won’t only impact the bottom line today, but the bottom line of tomorrow as well.
I believe that Aurora is making exactly those types of moves, and that the recent fall in the Aurora stock price may last a few days or a few weeks, but will ultimately be nothing more than a short dip.