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A worker looks at cannabis seedlings at the new Aurora Cannabis facility Friday, November 24, 2017 in Montreal.Ryan Remiorz/The Canadian Press

The frenzied run-up in marijuana stocks is threatening the sector's highest-profile takeover deals.

Aurora Cannabis Inc.'s hostile bid for CanniMed Therapeutics Inc., and CanniMed's friendly deal to acquire Newstrike Resources Inc. – both all-stock proposals – could get blown off course in their late stages by sharp gains in the targets' shares that are making the transactions unattractive.

CanniMed's stock settled on Tuesday at 11 per cent above a $24-a-share exchange limit proposed by Aurora. Because of that cap, CanniMed shareholders would get fewer Aurora shares for each of their own holdings than first proposed, and miss out on much of the recent rally that has seen Aurora's share price more than double.

In the case of Newstrike, its stock has soared close to 330 per cent over the past five trading days and was halted twice on Tuesday amid the volatility. The tiny company's market capitalization, at more than $1-billion, is now almost double that of CanniMed's. The exchange ratio – 1,000 shares of Newstrike for 33 of CanniMed's – is fixed, so investors can currently sell their holdings into the market at more than twice the bid value.

"What's happening is you're seeing a lot of speculation driving up the prices, and prices are being driven up further by FOLO – fear of losing out. There's no rational reason for it but people see a company doing well on limited good news," said Ranjeev Dhillon, a lawyer at Bennett Jones who specializes in cannabis deals.

Suitors may have to start sweetening offers with cash to get deals done, Mr. Dhillon said.

Investors are carving out positions in Canadian cannabis companies ahead of Ottawa's legalization of recreational pot this summer. Many of the shares are trading at massive – and growing – multiples to revenue.

To support the friendly buyout, Newstrike shareholders would have to be convinced that the combination with CanniMed offers long-term strategic benefits that outweigh any short-term gains, said Russell Stanley, analyst at Echelon Wealth Partners.

Aurora's bid for CanniMed is looking more tenuous. It offered 4.53 Aurora shares for each CanniMed share, but the variable ratio puts the current exchange at 1.8 Aurora shares for each CanniMed.

"We'll have a lot more clarity with the shareholder meetings occurring over the next couple of weeks, but if I was a CanniMed shareholder and I've got stock that I could sell for $25 or $26 in cash or take $24 of Aurora paper, I would take the cash, obviously, by selling it into the open market," Mr. Stanley said.

"So at this point where CanniMed is trading, the hostile bid from Aurora won't be accepted, and either a better bid is coming or the offer will just die."

Cam Battley, chief corporate officer at Aurora, gave no indication that the company is rethinking its plans. "Remember, this sector has shown a certain amount of volatility and has pullbacks in the past, so we'll see what happens over the coming weeks," he said.

Aurora's hostile bid is conditional on CanniMed abandoning its takeover of Newstrike. More than 50 per cent of Newstrike shares are committed to the deal with CanniMed, per the circular. It requires the support of two-thirds of Newstrike shareholders at a meeting in Toronto on Jan. 17. CanniMed is hosting its meeting on Jan. 23. Holders of at least 36 per cent of its shares have pledged their support for the Aurora deal.

"The CanniMed deal we entered into, we still believe is a strong deal for our shareholders," said Jay Wilgar, Newstrike's chief executive officer. "The stock has been trading like this for a few days. Believe me, we're flattered that people are excited about our story and they obviously are."

When asked if CanniMed is going to sweeten its offer, he said: "I don't know. You have to ask them that."

CanniMed CEO Brent Zettl declined to say if the company might reprice its bid, but said that CanniMed's share price has been held back by the Aurora cap. "We are confident that both groups of shareholders will realize the value which is when the Newstrike deal is completed," he said.

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