On Monday, Aurora Cannabis announced they would acquire MedReleaf Corp. for C$3.2 billion ($2.51 billion) in an all-stock transaction. And if the deal goes through, it will make Aurora the largest cannabis company in the world.
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And according to Seeking Alpha, CEO Terry Booth said the company isn’t going to stop at MedReleaf, it’s looking for more growth via the acquisition route.
“This deal checks every box,” he said at a press conference in Toronto. “We’re leaders in every box now, and we’re not looking back and we’re not going to stop here.”
Since November 2017, Aurora Cannabis Inc. has invested in retail liquor stores, an organic waste technology company, and along the way, acquired multiple cannabis producers, including CanniMed Therapeutics Inc. The buying spree culminated in the agreement to purchase MedReleaf this week.
A number of concerns are raising flags
One of the issues Aurora has not disclosed is how it plans to integrate its various acquisitions into its business model, and this is concerning to Charles Taerk, the chief executive officer of Faircourt Asset Management in Toronto. Faircourt runs the cannabis-focused UIT Alternative Health Fund, but Aurora is not included.
“When any company goes on an expansion through many acquisitions in a short period of time there are tendencies to have challenges integrating,” Taerk said Thursday by phone with Bloomberg News. “There are certain questions that are going to be asked and management should be more transparent with answers.”
Seeking Alpha’s Gary Bourgeault points out that Aurora is using Amazon’s growth plan to get itself in a position where it can then concentrate on making a profit. And this business strategy has proven to be good for Amazon.
Amazon’s Jeff Bezos expanded Amazon by targeting revenue growth at almost any cost and showed little concern for generating any meaningful earnings until the company was far enough ahead of its competitors it would be difficult for them to catch up. And this strategy is apparently working for Amazon.
Dilution of shares an issue
One of the biggest issues is the dilution of shares. Bourgeault writes, “The dilution factor for Aurora Cannabis is very real, and will have an impact on the company. But at this stage of the cannabis industry, I don’t see it being relevant.”
Marijuana stocks often don’t have access to traditional banking services because the banks could face criminal or financial penalties. Canadian cannabis stocks almost always turn to bought-deal offerings to raise capital.
Basically, in a bought-deal offering, common stock, convertible debentures, stock options, and/or warrants are sold in order to raise money that can be used to expand growing operations. And while Aurora Cannabis has had no problems raising capital, it is still a fact that all forms of bought-deal offerings “dilute existing shareholders by increasing the number of shares outstanding.”
When the number of shares outstanding increases, each existing stockholder owns a smaller, or diluted, percentage of the company, making each share less valuable. The Aurora deal to acquire MedReleaf is entirely share-based.
This means Aurora Cannabis is going to have to issue around 388 million shares in Canada to cover the C$3.2 billion it offered in the MedReleaf acquisition. This also means that MedReleaf millionaires may not last as long as Aurora holders after the deal, according to a note from GMP Securities analyst Martin Landry, reports the Financial Post.
The big issue being discussed in a number of financial circles is whether Aurora Cannabis is getting in over its head. Is it doing an Amazon? And if it is, do investors need to be wary of Aurora’s aggressive stance in buying its way to the top of an industry that has yet to be legalized?
