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As the marijuana sector consolidates, Aurora Cannabis Inc. has established itself as a bold deal-maker by using an unconventional takeover strategy.

Aurora is the only Canadian marijuana company to launch two billion-dollar takeovers. Documents filed with securities regulators show that to secure both, it used the same playbook: Privately negotiating first with its targets’ largest shareholders, rather than wooing management or directors.

To acquire CanniMed Therapeutics Inc. for $1.2-billion in January, Aurora struck a secret deal with the target’s three largest investors – in the midst of CanniMed’s attempt to acquire another grower named Newstrike Resources Ltd. By locking up 38 per cent of CanniMed’s shareholders in support of its own unsolicited deal, Aurora thwarted the other transaction.

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A similar scenario played out with Aurora’s proposed acquisition of MedReleaf Corp., new takeover documents reveal. Before going to MedReleaf’s board or management team with a bid, Aurora negotiated with the target’s largest owner.

It all started in early April when Tarik Ouass, who owns 14 per cent of MedReleaf through his company Zola Finance Inc., reached out directly to Aurora CEO Terry Booth and asked to meet. Face to face, Mr. Ouass “expressed his desire for MedReleaf to be combined with an industry leader,” and noted that several other large shareholders, collectively owning about half of the company, were interested in the same thing.

At the time, MedReleaf was in a bit of a rut. Like many industry rivals, its share price had corrected after a wild run-up early in the year. But MedReleaf was also struggling to find its feet again after Veterans Affairs Canada changed its reimbursement policies for medical marijuana usage. The company had made its name courting this market.

After telling Aurora his group of investors would support a takeover bid in which each MedReleaf share would be worth 3.45 Aurora shares, Mr. Ouass then went to MedReleaf’s board chair, Lloyd Segal, and filled him in. “Mr. Ouass explained that these shareholders were supportive of such a combination because it would provide a larger combined platform, increased breadth of operations, depth of management and enhanced trading liquidity,” according to the takeover documents.

Trading liquidity played a key role in both of Aurora’s major deals. Large shareholders of CanniMed and MedReleaf were antsy to cash out of their positions, but there hadn’t been enough action in either stock to handle a tidal wave of selling in the public markets. Aurora, however, is one of the most actively traded marijuana stocks.

Aurora also did not require CanniMed or MedReleaf investors to hold on to their new Aurora shares once the transactions close. They can sell right away and hopefully realize their gains.

To make sure it was getting the best price, MedReleaf’s board hired Canaccord Genuity Corp. to shop the company around. Potential partners and acquirers included large growers Canopy Growth Corp., Aphria Inc. and Cronos Group Inc., multiple sources say.

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Yet, no luck. “Canaccord noted that no party had indicated an interest in transacting at a significant premium to the then-current trading price of the common shares, and that the only other written acquisition proposal received was at a significantly lower value than the Aurora proposal,” the takeover documents reveal.

MedReleaf CEO Neil Closner and board chair Mr. Segal also personally met with an unnamed potential strategic investor in early May, but nothing came of it.

On May 14, Aurora’s $3.2-billion takeover was publicly announced, with a slightly sweetened exchange ratio of 3.575 Aurora shares.

The new takeover documents reveal that 13 MedReleaf investors and insiders have locked up their shares in support of the deal, including the four major shareholders, led by Mr. Ouass, as well as the board chair and some members of management. Notably absent, however, is Mr. Closner, who holds 2.8-million shares, or 4 per cent of the company’s stock. “It wasn’t required,” Mr. Closner said when reached by phone.

Because this isn’t the first time a powerful group of shareholders have driven a marijuana takeover, it appears that other companies are taking note. In the prospectus for its initial public offering in the United States on Wednesday, Nanaimo, B.C.-based Tilray Inc. has said one of the reasons it’s opting for a dual-class share structure is to help prevent a hostile bid from ever succeeding.

Both Aurora and MedReleaf will hold votes for their proposed deal on July 18. MedReleaf needs support from two-thirds of shareholders, while Aurora needs approval from a majority of investors.

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