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This 2015 file photo shows a grow room at Aurora Cannabis Inc.’s facility near Cremona, Alta.

Jeff McIntosh/The Globe and Mail

Aurora Cannabis Inc. says it is forging ahead with plans to launch a hostile takeover bid to acquire CanniMed Therapeutics Inc., a move that would create Canada's second-largest medical-cannabis company behind Canopy Growth Corp.

The Vancouver-based marijuana producer proposed the transaction last week and gave CanniMed's board until last Friday to respond. Aurora said on Monday that CanniMed, a smaller grower located in neighbouring Saskatchewan, hasn't replied to it. Aurora, which currently has a market cap of $2.3-billion, is going to present its proposed all-share offer to CanniMed's investors this week.

Such a proposed deal comes as the country moves to legalize the drug for recreational use next summer and local producers are looking for ways to quickly add scale to their businesses in order to serve more customers than just patients.

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"There's no question that this is a compelling deal," said Cam Battley, the executive vice-president at Aurora.

"By enhancing our capacity on the medical side through CanniMed, we'll be able to pivot a lot of our production, if we choose, to the consumer market to establish a brand."

But CanniMed isn't interested in doing a deal with Aurora.

It has instead agreed to acquire another company called Newstrike Resources Ltd., an even smaller producer that is best known for its ties to members of the Tragically Hip band.

On Monday, CanniMed held a call with analysts about its deal for Newstrike. It did not discuss the Aurora offer or take questions about it. The company declined to comment further.

The nascent legal-cannabis sector is growing up fast, as money pours into an industry spurred by governments around the world beginning to take steps to ease restrictions on the drug. Investors are starting to pick winners and losers, making it tougher for smaller players to raise money in the public markets at reasonable rates.

A tie-up between Aurora and CanniMed could be the start of a wave of consolidation among Canadian cannabis growers hunting for scale.

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Aurora has already secured the support of a group of investors that own 38 per cent of CanniMed. In fact, these shareholders reached out to Aurora to express their discontent with how CanniMed is being run, Mr. Battley says. He won't name the investors, but says they all agree that CanniMed is being mismanaged.

"They came to us. They approached us," Mr. Battley added. "They had serious concerns about CanniMed management's ability to execute. They were extremely unhappy."

To proceed, Aurora needs two-thirds of CanniMed's shareholders to accept its proposed offer. Mr. Battley says Aurora is "confident" it can shore up those votes.

"It's not a hard case to make," he said. "It's an extremely generous offer with a compelling strategic rationale."

The all-stock offer valued CanniMed at $24 a share, representing a 57-per-cent premium to where the stock closed before the deal was made public. The bid, if approved, would give investors in CanniMed 4.5 Aurora shares for every CanniMed share.

Shares of CanniMed have jumped in the days after Aurora's offer was unveiled, rising another 2 per cent Monday to $19.71.

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Shares of Aurora jumped 6 per cent to $5.85. In the past month, its stock has more than doubled.

Hostile takeovers can be expensive, time-consuming and distracting. Aurora insists CanniMed is worth the fight.

"The knock on them is that the management team simply hasn't executed," Mr. Battley said. "And that's what we're known for. We've got what CanniMed doesn't."

The combined company would have five facilities to grow cannabis and a total of 40,000 registered patients in Canada. Aurora says it also has its sights set on CanniMed's technology that allows for the drug to be administered in different ways, such as by taking capsules.

Aurora would also plan to export product grown by CanniMed overseas to be sold in markets across Europe.

Canaccord Genuity Corp. and McMillan LLP are advising Aurora.

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