Here’s Why Aurora Stock May Survive the Volatility
A simple case of acquisition has turned two marijuana companies—Aurora Cannabis Inc. (TSE: ACB), (OTCMKTS: ACBFF) and CanniMed Therapeutics Inc. (TSE: CMED), (OTCMKTS: CMMDF)—into the biggest adversaries. And while the two opponents are engaged in this conflict, the holders of these marijuana stocks are caught in the crossfire. The question is, which side will emerge victorious once this battle is over?
Aurora and CanniMed have been fighting like cats and dogs since November last year. For one of them, CanniMed Therapeutics, it has become a matter of life and death. Jittery stockholders fear the final outcome to be nasty.
The good news is that the two sides called for a temporary ceasefire on Thursday. Here’s what we make of it.
CanniMed and Aurora have mutually agreed that neither of the two parties would be pursuing their planned acquisitions—Aurora of CanniMed, and CanniMed of Newstrike Resources Ltd (CVE: HIP), (OTCMKTS: NWKRF)—until January 21.
There is a high chance that the management teams of the two companies will be meeting next week to discuss their next plan of action. We expect that CanniMed stockholders may get to hear good news following the meeting. Aurora stockholders will likewise not be disappointed. (More on this later.)
Making Sense of the Aurora-CanniMed Fight
For those unfamiliar with the matter, here’s a brief background. I’ve covered it in more detail here.
Canada’s second-largest marijuana company and quite easily one of the largest in the world, Aurora Cannabis is looking to nab a small player in the industry. This seemingly small marijuana company, CanniMed Therapeutics, is actually turning out to be a big challenger. CanniMed has outrightly refused to give in to Aurora’s hostile takeover offer.
First, CanniMed tried to adopt a poison pill against Aurora, but failed after the regulatory court in Canada gave a verdict against it. Then, just earlier this month, CanniMed filed a $725.0-million lawsuit against Aurora to thwart its progress. Basically, the management of CanniMed is leaving no stones unturned to foil Aurora’s acquisition plans.
But all of CanniMed’s efforts have so far been in vain. By simply colluding with a few major CanniMed shareholders, Aurora has managed to get 38% of CanniMed’s shareholder vote in its favor.
To seal the deal, Aurora needs at least a two-thirds majority or 66.67% of the shareholders on its side. But with Aurora swiftly making progress, we believe that it shouldn’t be too difficult to secure now.
Needless to say; CanniMed’s management has sensed the inevitable, or at least is deeply concerned about Aurora’s growing influence over its shareholders. This is why the company has decided to postpone its upcoming shareholders’ vote and has instead invited its suitor for a “friendly discussion.” (Source: “Canadian cannabis firm CanniMed in talks with suitor Aurora,” Reuters, January 18, 2018.)
Mind you, CanniMed is itself interested in buying a much smaller marijuana company, Newstrike Resources Ltd. Newstrike has become the biggest bone of contention between Aurora and CanniMed.
Newstrike stockholders have voted in favor of the CanniMed merger with an overwhelming majority on Wednesday, while CanniMed stockholders are due to cast their vote next week. However, Aurora does not approve of this deal.
Aurora may see value in CanniMed but it doesn’t see any worth in taking Newstrike under its wing. Aurora’s management believes that CanniMed would be draining stockholders’ equity on a worthless deal if the CanniMed-Newstrike merger goes through.
What to Expect from the Upcoming Aurora-CanniMed Meeting
As we approach the final days of the vote, time is running out for CanniMed. Take note that CanniMed shareholders were supposed to cast their votes on the CanniMed-Newstrike merger next Thursday. But CanniMed has now postponed the voting until January 25, thus buying some more time to go over the Aurora offer again.
Should the two parties meet before January 25, we anticipate that CanniMed’s management may seek a middle ground with Aurora. Obviously, CanniMed would still be pitching the Newstrike merger, but most importantly, they’d be negotiating Aurora’s offer price—probably something upward of $26.00. That’s the average price where CMED stock has traded this month.
Let’s do some math to understand why renegotiating the offer price makes sense for both companies.
When Aurora first made the acquisition offer, CMED stock was trading at about $15.00 apiece, while ACB stock was hovering over $5.00. Aurora offered to pay CanniMed stockholders a maximum of $24.00 for every CMED stock, that’s about 4.52 ACB stock for every CMED stock in an all-stock offer.
Obviously, the price of CanniMed stock shot up overnight after the acquisition offer was made. By next morning, it was trading over $21.00. Since then, CMED stock has traded in the $20.00s range.
Chart courtesy of TradingView.com
If the two parties do agree on a price in the late $20.00s, it’s a win-win for both sides. With Aurora stock currently trading a little under $13.00, Aurora could close this deal by paying much less than the originally agreed upon price of 4.52 ACB stock.
CanniMed stockholders would likewise earn a premium over their investments and convert their stake in a small-cap company to a $5.0-billion marijuana industry behemoth.
Despite the ongoing fight, both of these marijuana stocks have been soaring since the beginning of this year. As we inch closer to Canada’s legalization day, there’s a renewed investor interest in marijuana stocks.
At this point, we must warn our readers that most marijuana stocks are trading at lofty high-price multiples, which certainly make us dizzy. Buying at these all-time highs may be a very risky venture. So execute due diligence before making a decision.
We must also warn our readers that our analysis rests on speculation. We can’t be sure how things will transpire in the coming week until the two management teams make them public. However, we are foreseeing that Aurora may eventually succeed in acquiring CanniMed, based on the market information we have.
However, should the deal fall through, we expect both stocks to plummet. CanniMed’s plunge may be much deeper than Aurora’s. Yet, we foresee a steady recovery in their prices in the following weeks. For Aurora, the recovery may be more brisk and robust due to reasons laid out in my Aurora stock price forecast here.
That said, exercise caution because volatility will be extremely high in the coming days as the Aurora-CanniMed saga approaches its climax.