Institutional Shareholder Services Inc. is recommending CanniMed Therapeutics Inc. investors vote in favour of the medical marijuana company's takeover of Newstrike Resources Ltd., a blow to a larger industry rival seeking to acquire CanniMed.
ISS, the proxy advisory firm, said Aurora Cannabis Inc.'s hostile, all-share offer for CanniMed initially looked like the superior proposal, but the recent runup in the shares of Canadian marijuana producers made that bid unattractive due to its share-exchange structure. Aurora's offer is conditional on CanniMed abandoning its takeover of Newstrike.
CanniMed shareholders are slated to vote on the friendly Newstrike deal on Jan. 23, following a vote among Newstrike investors next Wednesday. It is offering 33 of its shares for every 1,000 Newstrike shares.
The market capitalization of Newstrike, a tiny consumer-focused marijuana producer that has yet to generate revenue, surged to more than $1-billion early this week as part of a cannabis-sector buying frenzy. The shares have since retreated, pulling the value of the company back to $678-million on Friday.
Aurora is offering 4.53 of its shares for each CanniMed share, but that is subject to a cap of $24 per CanniMed share. When the target's stock rises above that price, the exchange ratio falls, resulting in fewer Aurora shares per CanniMed share. CanniMed stock sold for $24.45 on Friday. It reached a high of $27.26 on Monday.
"Although Aurora's hostile bid initially seemed to be a superior alternative ... a sharp increase in valuations for Canadian cannabis producers in recent weeks has significantly eroded the appeal of this option," ISS said in a report.
Complicating matters, shareholders with about 36 per cent of CanniMed stock have pledged to support Aurora's unsolicited bid.
ISS said acquiring Newstrike, a company backed by Canadian rockers The Tragically Hip, will give CanniMed access to the new recreational cannabis market when it is legalized later this year, while also expanding its production and geographic reach. The partnership with the band offers a "positive branding impact."
Aurora's offer, meanwhile, would bring strategic benefits, including increased market share, production capacity, efficiencies of scale and a higher profile. However, "such compelling strategic rationale has been overshadowed by the negative impact of the $24 offer cap that, as of this report, results in approximately halving the exchange ratio and CanniMed's ownership stake in the combined entity, and in turning the initially accretive transaction into a dilutive one," ISS said.