Canada's legal marijuana sector has reached a new high: the first deal to exceed $1-billion.
Aurora Cannabis Inc. said Wednesday it was buying CanniMed Therapeutics Inc. for $1.2-billion, ending a nasty, two-month takeover battle. Under the terms, Aurora will pay a mix of stock and cash, which is capped at $140-million. If CanniMed investors elect to receive the full cash amount, CanniMed will be valued at nearly $47 per share, as of Wednesday's closing price.
The final offer is a big premium to Aurora's previous unsolicited bid for CanniMed, which was launched in November and had a per-share limit of $24.
Since then, marijuana shares have shot higher, giving extremely lofty valuations to companies that, in many cases, have relatively small businesses. For $1.2-billion, Aurora is acquiring a company that had just $4.7-million in revenue in the fiscal third quarter and ran an operating loss of $1.07-million.
Even though the negotiations turned last week in the direction of a friendly takeover deal, the animosity between the two companies remains.
Brett Zettl, chief executive officer at CanniMed, said in an interview that he was "very disappointed" at the outcome. And, he warned of the "significant" risk in the transaction as cannabis stocks climb to new levels, pushed along by investor enthusiasm as Ottawa moves toward legalizing recreational use of the drug this summer.
What's more, the takeover by Aurora means an end to CanniMed's proposed deal for Newstrike Resources Ltd., the cannabis grower backed by band members and management of the Tragically Hip. CanniMed will pay a $9.5-million break fee to Newstrike.
"I'm very disappointed, actually, on some levels," Mr. Zettl said. "I was keenly looking forward to working with Newstrike, and I thought that was a really good fit."
Those plans were derailed last week after Aurora came back to CanniMed with a revised offer in hand and a willingness to negotiate. Mr. Zettl says Aurora did so because it was clear that CanniMed had the votes to get the Newstrike deal done.
Aurora's final offer proved too enticing for Mr. Zettl's board and major investors to pass up.
"The reality is it's completely out of my control at some point, simply because the numbers got too big and the shareholders are demanding that they want to have the value," he said. "I had to let it go to the benefit of the shareholders."
But he warned that being paid in mostly shares is perilous, as cannabis valuations keep spinning into another orbit.
"There is significant risk. There's risk in taking paper, a significant risk," Mr. Zettl added. "The argument coming back was [Aurora's stock is] so liquid, you should be able to exit as quickly as you want without any trouble at all. The challenge is, when the liquidity events start happening, will the value be there?"
Terry Booth, CEO at Aurora, rejected the notion that the runup in his company's stock may have gone too far.
"I'm not going to let anybody say we're overvalued. Not a chance," he said in an interview, adding that he wants Aurora to become the world's largest cannabis company.
Aurora has a market cap of $6.3-billion today. Yet, in its last quarter, it generated just $8.3-million in revenue. But Mr. Booth noted that was 40 per cent higher than the previous quarter. "It's a good jump up, isn't it" he said. Mr. Booth can easily see the day when Aurora is posting $800-million a year in sales. Then, he said, take that and scale it over 10 years, making its current market cap somehow look not so frothy.
When asked how he can justify his stock being priced today for how Aurora could perform a decade from now, he fired back: "Is that not how the stock market works?"
In addition to operating in the Canadian market, Aurora is pushing into the burgeoning medical-cannabis markets of Denmark, Italy, Australia and Germany.
For Mr. Booth, that's where CanniMed fits in.
The Saskatoon-based company was Canada's first licensed medical-marijuana producer, starting in 2000. CanniMed has since amassed a strong roster of patients and is still seen as a go-to producer for doctors across the country, Mr. Booth says. He says CanniMed has been able to get a head start in the lab, testing new dosage forms and delivery methods and working on clinical trials to study cannabis use for certain medicinal purposes.
Mr. Booth said he believes Aurora can help CanniMed monetize its research much faster.
"It's a good company for us to own. It wasn't a good company for them to own," he said. "We will make that company far more money than they ever thought they could make. I mean that."
Still, he insisted Aurora grows better marijuana than the company he just acquired.
"The quality of our cannabis is better than his," Mr. Booth said, referring to CanniMed's Mr. Zettl.
Before Mr. Booth started Aurora in 2013, he did his homework, stopping off at dispensaries in Vancouver along the way. He says CanniMed "had a terrible reputation and they continue to have it. And that's because they grow pretty decent looking bud, but then they take the stalks, the leaves and the stems and they blend it, and it makes it harsh and it makes it gross."
Looking back, Mr. Booth wished the takeover battle with CanniMed didn't get as hostile as it did, with armies of lawyers, financial advisers and special committees taking over and insults flying back and forth.
"You have 16 advisers that tell you this is the way to do it. I think they were wrong on a lot of counts," he said. "I don't think I'd do another hostile unless it was very compelling."
He said talks had been stretching late into the night in recent days. Last night, the two CEOs got on the phone and Mr. Booth says they resolved most of their issues within an hour.
Mr. Booth had some consoling words for his CanniMed counterpart. "I imagine he regrets going public. But then again, he's a very rich man because he did."