Hostile takeovers haven't been part of the discussion about marijuana stocks. Until now.
When Aurora Cannabis (NASDAQOTH:ACBFF) submitted an acquisition proposal to CanniMed Therapeutics' (NASDAQOTH:CMMDF) board of directors in November, it hoped there would be mutual agreement that a combination of the two Canadian marijuana growers would be viewed as a positive by both sides. To put it mildly, that didn't happen.
Aurora Cannabis now finds itself with a serious fight on its hands. At this point, it's entirely possible that Aurora's takeover attempt of CanniMed goes up in smoke. One thing you can count on if that happens, though: It won't be the end of the story.
Deal or no deal?
When Aurora Cannabis first announced its proposal on Nov. 14 to buy CanniMed, it gave CanniMed's board of directors three days to respond to the proposal. CanniMed didn't respond. Instead, the company announced its own plans to acquire Newstrike Resources Ltd.
Aurora followed up by formally launching its takeover bid of CanniMed on Nov. 20. It offered to buy all of CanniMed stock for $24 per share, nearly 57% higher than CanniMed's closing price before the initial announcement on Nov. 14. Although CanniMed formed a special committee to review Aurora's bid, the company's board also adopted a "shareholder rights plan" to prevent Aurora from acquiring any additional CanniMed shares other than those tendered to its takeover attempt or from entering into any lock-up agreements other than those it had already entered into.
CanniMed's CEO even called for the government of Saskatchewan to intervene to block Aurora Cannabis' hostile takeover bid. That move prompted Aurora Cannabis CEO Terry Booth to respond that it was "the latest in a series of increasingly desperate schemes by CanniMed management" to disenfranchise its own shareholders.
In a nutshell, the Canadian cannabis industry is seeing a knock-down, drag-out kind of fight the like of which it hasn't seen before. But which side will win this fight? That's going to be up to CanniMed's shareholders.
Why all the fuss?
The reason for the battle between Aurora Cannabis and CanniMed boils down to money. Canada is on track to legalize recreational use of marijuana next year. Conservative estimates call for the market to be at least $4.2 billion, but some think it will be much larger.
Aurora Cannabis knows that scooping up CanniMed's operations will give it significantly greater production capacity to meet what should be very high demand for recreational marijuana. The company obviously believes that a nearly 57% premium represents a fair offer to CanniMed's shareholders. Terry Booth thinks the combination of Aurora and CanniMed would create "a powerhouse leader in the global cannabis sector."
CanniMed holds similar ambitions. The company's management team said that buying Newstrike Resources would "create a premier global cannabis company." Should the all-stock transaction go through, the combined company would have a market cap topping $500 million.
As for Aurora's offer, CanniMed CEO Brent Zettl referred to it as "opportunistic and coercive." Aurora's buyout offer involved giving CanniMed shareholders 4.52586207 Aurora shares for each CanniMed share, up to a maximum of $24 per CanniMed share. Zettl maintains that even Aurora's management believes Aurora stock won't remain at its "currently inflated valuation."
If at first you don't succeed...
So what happens if Aurora's takeover attempt fails? I don't think the company will sit still long before it goes after another company. There's a lot at stake in continuing to rank among the largest marijuana suppliers in Canada.
There are several marijuana growers with market caps in the same ballpark as CanniMed. Supreme Pharmaceuticals, Emerald Health Therapeutics, and Organigram Holdings could be potential backup acquisition targets for Aurora.
The challenge, though, will be if Aurora Cannabis stock sinks on a failed takeover attempt of CanniMed. Aurora doesn't have enough cash to fund a big deal, so the company is dependent on a premium price for its stock to make an attractive offer. Should Aurora stock drop enough, the company could even find itself an acquisition target.
My guess, however, is that Aurora won't have to go to a "plan B." The company already has lock-up agreements with investors holding 38% of CanniMed stock who ensure they'll support Aurora's takeover of CanniMed. Aurora needs to win two-thirds of outstanding shares to secure the deal. That seems achievable, although it's not a sure thing.
I think there will be continued consolidation in the Canadian cannabis industry as players scramble to meet demand. Some of that consolidation will be on friendly terms, but there could also be more hostile takeover attempts. I also anticipate more deals and partnerships between Canadian marijuana growers and larger companies from other countries. In my view, the Canadian "green rush" is just beginning.