Weed deals aren't what they used to be, and it's not clear that's a good thing.
Aurora Cannabis Inc.'s $1.2-billion takeover offer for CanniMed Therapeutics Inc. – the industry's richest-ever transaction – could give some of its investors nosebleeds.
Aurora's executives have got some explaining to do about how a company it tried to snap up with a hostile approach worth $24 a share just two short months ago is now being absorbed for nearly twice as much.
Not only has the price tag skyrocketed, but now Aurora has added $140-million in cash to the equation. That's real money rather than just paper in a nascent industry in which valuations have ballooned at a much more frenzied pace than actual financial results.
Aurora has so far been scant on details about how it plans to integrate its new acquisition.
One thing is for sure, there will be no arm-twisting to get CanniMed shareholders to tender. They're up nearly 180 per cent since before Aurora made its interest in acquiring the country's oldest medical marijuana producer known in mid-November. In the same time, Aurora's shares have doubled. In the week before Wednesday's deal was announced, CanniMed stock rose 35 per cent.
How it all got to this dizzying height is understandable, if not completely justifiable by fundamentals. The stock market's growing marijuana habit has dominated headlines in recent months, as Ottawa moves toward legalizing recreational cannabis.
The future market for recreational marijuana has been forecast at $8-billion and higher. That's in addition to current medical sales.
A push toward legitimacy among producers has also added to the allure. In the fall, beer, wine and spirits company Constellation Brands Inc. bought a 9.9-per-cent stake in rival Canopy Growth Corp. Canada's major banks have been testing the waters on financing the industry, although still cognizant of potential reprisals in their U.S. branches.
Meanwhile, everyone's beer-league hockey teammate, Uber driver and yoga instructor is claiming to be getting rich investing in pot stocks. It's prompting some killjoy investment experts to suggest this could be the equivalent of the dot-com era for millennials.
Even after inking the deal, Brent Zettl, CanniMed's chief executive officer, expressed uneasiness about a thick layer of froth on the industry that is tied more to speculation than multiples of earnings per share.
"My firm belief is it's fast and loose right now. And we got swept up into it and now we're part of it," Mr. Zettl told The Globe and Mail on Wednesday. "It made our shareholders happy for the most part. We did well by our shareholders, now we have to make sure we continue to do well by our people and our patients."
By one often-used metric, the pressure-cooker negotiations yielded a very dear price. The deal values CanniMed's fully funded gram of cannabis production capacity at $60, compared with an industry average of $22, according to Echelon Wealth Partners analyst Russell Stanley.
He cautions, however, that strictly adding capacity in CanniMed's home base of Saskatchewan is not the real draw for Aurora. Indeed, it is already adding several football fields of growing space at its new Aurora Sky greenhouse complex at Edmonton's airport.
CanniMed's attraction, then, is its strength in products such as cannabis oils and other specialty remedies, its large base of loyal patients and its long experience growing the plant.
As the industry expands in the new legalized world, the future belongs to the lowest-cost producers that have scale and those that offer something other than just the raw commodity, Mr. Stanley said.
That will be the true test of whether the price for CanniMed is a fair one, but it could be a while before Aurora's financial results justify today's combined market capitalization of $7.4-billion.
Yes, the recreational market has yet to open up, but for the first nine months of the 2017 calendar year, their revenues together added up to $31.2-million. It's unlikely legalized pot will hit the market like clockwork on July 1, so revenue growth won't be instantaneous.
As part of the deal, Aurora persuaded CanniMed to kick Newstrike Resources Ltd. – the Tragically Hip-backed pot producer – to the curb after previously agreeing to buy it. That would have added another, perhaps, $500-million-plus to the overall cost.
It showed Aurora was prepared to pay up, but not pay anything. Its shareholders are no doubt relieved by that.