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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

Just after 1 a.m. on Wednesday, Newstrike Resources Ltd. chief executive officer Jay Wilgar was sitting in his Burlington, Ont., living room with a cup of coffee when he got the call he was dreading.

Brent Zettl, CEO at CanniMed Therapeutics Ltd. and a close friend after months spent building toward a partnership, was on the line. Hours before, CanniMed struck an agreement to be acquired by Aurora Cannabis Inc. for $1.2-billion, the biggest deal Canada's young marijuana sector had ever seen. That was twice as much as it had previously offered in a hostile bid. The deal was done and Newstrike wasn't in it.

"It was a surreal thing, realizing that this is likely the end of this whole thing," Mr. Wilgar said Thursday. "There was a certain level of sadness, for sure."

On Wednesday morning, after marathon negotiations, Aurora and CanniMed announced one of Canada's most unusual takeovers. The battle that led up to it brought together marijuana producers, a seemingly unstoppable market for their shares, entrepreneurs with limited experience in mergers and acquisitions, and the country's best known rock 'n' roll band, the Tragically Hip. It will serve as a lesson for business students on what can happen in deal-making amid volatile markets.

For Mr. Wilgar and other players involved, it proved to be an emotional roller coaster. The stakes were high and the battle was heated.

Just days earlier, it appeared CanniMed's purchase of Newstrike, which has its sights on the soon-to-be-legalized recreational market, was on the verge of coming together.

It was on Jan. 17 that Newstrike's shareholders had voted overwhelmingly in favour CanniMed's all-share offer, spurning a hostile all-share bid that Aurora had launched for CanniMed two months earlier. All that was left was approval by CanniMed's investors at a meeting scheduled in six days. Aurora's initial hostile bid for CanniMed was conditional on the target firm abandoning its own friendly deal with Newstrike.

Mr. Wilgar was growing confident as pieces fell into place – major proxy advisory firms had recommended the CanniMed-Newstrike deal over Aurora's initial bid for CanniMed. That offer had been left in the dust as shares in cannabis companies skyrocketed.

CanniMed had placed gaudy ads in national newspapers to suggest its shares could be worth as much as $49, assuming several factors fell into place.

A letter to Aurora's board from New York hedge fund Senvest Management LLC, which owns 8 per cent of CanniMed and was seen in this battle as a bellwether for other investors, appeared to seal the deal.

Senvest had shifted its support away from Aurora and in favour of the takeover of Newstrike, which had made its partnership with the Tragically Hip key to the company's future marketing plans. The band members have a stake of more than 5 per cent in the company, and plan to lend their name to its products as a way to enhance the cachet. The reason for Senvest's about-face: Aurora's bid had a cap of $24 a share, and CanniMed had traded above that since the start of the year. "We started feeling like the pendulum was swinging our way," Mr. Wilgar said. "The one thing that was going to throw a wrench in it was if Aurora came back with a revised offer."

That's what happened.

Realizing it could no longer acquire enough CanniMed votes to support its offer, Aurora invited CanniMed to talk, with chief corporate officer Cam Battley telling reporters Aurora would go into the discussions with an open mind. It was clear it would have to pay up if it wanted to get CanniMed's well-known expertise in growing technology, loyal consumers of its medical marijuana and value-added products such as oils, which offer very rich margins.

The only questions were, how much would Aurora have to sweeten its offer, and would Newstrike be part of the deal? In recent weeks, investors had pushed Newstrike's market capitalization above $1-billion, although its shares had pared gains. The CanniMed-Newstrike process was put on hold and through last weekend, talks toggled between a deal including Newstrike and one without.

Aurora and CanniMed agreed on terms after talks that lasted into the wee hours of Wednesday. At $1.2-billion, it was twice the value of Aurora's initial unsolicited bid for CanniMed, and included a new wrinkle: $140-million in cash. To the dismay of Mr. Zettl, who had previously called Aurora a "dot-bong in the making," he could no longer keep Newstrike as a partner. The offer was too rich.

He would rather have not abandoned his own long-considered deal, with its unique branding hook that involved a band that had gained a unique perch in both rock 'n' roll and Canadiana with such hits as Wheat Kings, New Orleans Is Sinking and Ahead By A Century. He and Mr. Wilgar had struck up a close friendship through their deal talks. "I really like Jay. He's like the little brother I always wanted to have. I told my dad that the other day," Mr. Zettl said over breakfast in early January. "I have three other brothers. They're all younger."

However, Aurora CEO Terry Booth said he was never supportive of including Newstrike in a deal, especially as stock prices in the industry made the cost exorbitant. Its involvement was, to Mr. Booth, essentially a poison pill and offered no immediate revenue, as it had just won its sales licence.

"The guys at Newstrike did very well. They're a licensed producer. I've met them, they're good guys. But they've not sold a gram of cannabis. So if you haven't sold a gram of cannabis, you have a lot of work to do," he said.

He questioned the value of Newstrike's connection with the Hip, especially now that the band no longer tours after the death of lead singer Gord Downie.

"As sorry as it is, Gord died. I have his picture behind my desk at my office. I've had it there for years. But understand, not many people know the other members of the Hip," he added. "I didn't get the deal when I first saw it. I don't get the deal now. We were not interested in Newstrike. And you saw that from the get-go."

Mr. Booth, whose company is best known for a massive greenhouse it is building at Edmonton's airport, said he would have preferred to negotiate a friendly deal from the start, rather than go through the acrimony of a hostile offer.

"Once you get into the guts and glory of a hostile … your advisers turn from two to 16, committees are formed," Mr. Booth said. "We wanted to go friendly out of the gate, the investors that had contacted us had done a lot of work on what [licensed producers] matched CanniMed the best. They were not satisfied with CanniMed's execution."

Indeed, at least two of CanniMed's directors had, according to Mr. Zettl, shopped the Saskatoon company around without the knowledge of the rest of the board on the behalf of shareholders that included SaskWorks Venture Fund Inc., Apex Investments LP, Golden Opportunities Fund Inc. and Vantage Asset Management Inc.

The scrap intensified two weeks ago when CanniMed filed a lawsuit against directors Rob Duguid and Doug Banzet as well as its largest shareholders, Aurora and Aurora's financial adviser Canaccord Genuity Group Inc., for allegedly misusing its confidential information and conspiring to engineer Aurora's hostile takeover of CanniMed. It sought damages of $725-million. (The suit is being dropped as a condition of the deal.)

Canaccord had initially been advising Newstrike in its sale to CanniMed. Then, on a Friday in November, three days before CanniMed's board was set to vote on the deal, the investment bank terminated its dealings with Newstrike after a conflict emerged. The prior day, Aurora had reached out to its bankers at Canaccord to talk about its pursuit of CanniMed. Canaccord has a right of first refusal with Aurora to work as its financial adviser on deals.

Newstrike had alleged that Canaccord breached its contractual and fiduciary duties and reiterated that its and CanniMed's confidential information has been misused by Aurora. Mr. Booth denies this, and in a filing, Canaccord said it did not have a fiduciary duty to Newstrike and that their agreement could be scrapped at any time.

Mr. Wilgar and Newstrike were not left with nothing, having received a break fee of $9.5-million. Investors were still interested in its prospects when recreational marijuana is legalized later this year. The company raised more than $90-million in the hours after Aurora and CanniMed clinched their deal, selling shares in a private placement. He says he holds no animosity for Mr. Zettl.

"Absolutely not. I think everyone needs to remember that we didn't choose for that to happen. There have been some references that we were left at the altar. I think that's really not the case. If you really look at it, it was a mutual decision between our two companies," he said. "There's certainly absolutely not bad blood between Brent Zettl and myself. I have a huge amount of respect for what he's done in this industry."

In an interview on Wednesday, Mr. Zettl sounded defeated and concerned over what the mostly share deal would be worth by the time it closes.

"It's personal. This is a company I've worked for, not just 17 years in marijuana, but many years before that," Mr. Zettl said. "It's being removed from us. But that's what's best for the shareholders. It bothers me, but at the same time I have to embrace it."

Andrew Willis of Report on Business tells investors why they should be wary of buying into private pot businesses going public

The Globe and Mail

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