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Report On Business MedReleaf confirms deal talks with Aurora Cannabis, others

Employees of MedReleaf trim cannabis plants in one of the company's facilities in Markham, Ont.

Christopher Katsarov/The Globe and Mail

Medical cannabis grower MedReleaf Corp. confirmed Thursday that it has held talks with Aurora Cannabis Inc. and other rivals about possible transactions.

In a news release, MedReleaf said that “it engages from time to time in discussions with other industry players, including Aurora Cannabis, regarding various alternatives.” It added that the company “has not entered into an agreement to effect any particular transaction, and there can be no assurance that such discussions will result in any such agreement.”

The news comes a day after The Globe and Mail reported that MedReleaf, based in Markham, Ont., was in play and had contacted several possible suitors about a deal, according to sources. Aurora submitted a friendly offer to acquire MedReleaf, one source said. The offer was being reviewed by a committee of independent directors at MedReleaf, the source said, adding that a transaction wasn’t certain.

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Related: Cannabis consolidation picks up speed as MedReleaf seeks deal

Growers are bracing for the looming threat of oversupply of legal cannabis in Canada – and the pricing pressure that could come with it, analysts say. MedReleaf’s talks with Aurora and other players come at a time of increasing consolidation in the space, as companies look to add scale in an effort to lower their cost structures, while others look to cash in on elevated valuations.

Health Canada has issued 104 licences to grow and sell medical marijuana to patients or just grow the plant. A little more than half of the licences are in Ontario. There are at least 500 applicants in the pipeline, according to Health Canada figures provided to website Marijuana Business Daily.

At the end of last year, there were 268,502 patients registered with licensed producers in the country, according to Health Canada. The bulk of them are located in Ontario and Alberta. (Patients can register with more than one grower.)

Most producers, however, are gearing up to serve a much-bigger segment of the market: Canadian recreational users.

Despite facing calls to delay the legislative process, Prime Minister Justin Trudeau said on Thursday that the government is moving forward this summer with its plans to legalize and regulate the recreational use of the drug. Ottawa says it’s aiming to displace the illicit trade and get the drug out of the reach of children.

Aurora also confirmed Thursday in a news release that “it engages in discussions with industry participants from time to time, including MedReleaf.” It added “there is no agreement, understanding or arrangement with respect to any transaction with MedReleaf.”

A deal would be the latest in a string of purchases by Aurora, which this week closed its January acquisition of Saskatoon-based CanniMed Therapeutics Inc. When it was announced near the peak of stock-market valuations, that deal was valued at $1.2-billion, the largest in the history of the nascent sector.

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The possible purchase of MedReleaf would top that, marrying two of the sector’s largest players. MedReleaf, which was founded in 2013, has a market cap of $2.25-billion.

The company sells dried bud, oils, capsules and topical creams to patients across Canada. It grows marijuana at its indoor facility in Markham and is expanding to another indoor site in Bradford, Ont. It recently purchased land in Exeter, Ont., where it will build a greenhouse. It’s pushing to expand into the medical markets in Germany and Australia.

In its latest quarter ended Dec. 31, MedReleaf recorded sales of $11.3-million and a loss of $5-million. It had $115-million in cash at the end of last year. It raised another $132-million from a financing in January.

In April, the company signed a three-year supply agreement in Quebec that will see MedReleaf earmark 8,000 kilograms of cannabis for the provincial retailer during the first year.

MedReleaf is already taking steps to market its recreational brands. In February, the company launched San Rafael ’71 and created a cannabis-inspired beer called 4:20 Pale Ale with Amsterdam Brewing. It has unveiled another brand called AltaVie, focused on wellness. It will sell snack bars called “Cannabis Crunch.”

At 10:15 a.m. on Thursday, securities of Aurora and MedReleaf were halted, pending news, and resumed trading at 1:45 p.m. after the companies published their news releases.

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Aurora was up 1 per cent in the session to $8.04, trading flat since the halt. MedReleaf finished the day 2 per cent higher to $22.25. The stock rallied toward the close after falling in price moments after the resumption of trading.

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