You can learn a lot about a company's management team by the deals that it makes and doesn't make. Some executives want to grow through mergers and acquisitions regardless of the cost. Others choose to be more deliberative about how they spend shareholders' money.
Recent deals made by Aurora Cannabis (NYSE:ACB) and Tilray (NASDAQ:TLRY) are especially instructive. In fact, my view is that Tilray just schooled Aurora Cannabis on the right way to make an acquisition. Does this hint at Tilray being the better marijuana stock over the long run?
The art of the deal
Let's examine Tilray's latest acquisition. On Tuesday, the company announced that it was buying Ontario-based marijuana grower Natura Naturals. The total purchase price could be up to 70 million in Canadian dollars, or around US$52 million.
Note the operative words "could be up to," though. Tilray will pay CA$15 million in cash at closing plus CA$20 million in Tilray stock. Additional payments are based on achieving specified quarterly production milestones over a 12-month period.
This structure is smart. Tilray knows exactly what it wants to get from the Natura Naturals deal -- additional production capacity. And if all goes well, the company will get a lot more capacity. Natura Naturals owns a 662,000-square-foot greenhouse, of which 155,000 square feet is currently licensed for production.
There are also other details in Tilray's acquisition of Natura Naturals that are noteworthy. Tilray CEO Brendan Kennedy stated that the deal came only after "an extensive and thorough search for the right supply partner." Tilray said that it "conducted extensive due diligence on Natura's cultivation facility and cannabis products." The company relied on investment firm Cowen to provide a fairness opinion on the transaction.
It's also nice that Tilray was able to fund the acquisition partially through cash. The company's management team has done a good job of preserving the cash raised through its initial public offering (IPO) in July 2018. While Tilray raised an additional US$450 million by issuing convertible senior notes, the company hasn't diluted the value of existing shares through the issuance of additional stock.
Not so artistic
Then there's Aurora Cannabis' latest deal -- one of many the company has made over the last few years. The marijuana producer announced on Jan. 14, 2019, that it was acquiring Whistler Medical Marijuana. Whistler has a great reputation. The company was one of the original 10 licensed producers in Canada's medical marijuana market and is a leader in the organic cannabis market.
But while Tilray's acquisition of Natura Naturals might demonstrate the art of the deal, Aurora's acquisition isn't so artistic.
Aurora Cannabis is paying CA$175 million (around US$132 million) for Whistler. That's a whole lot more than what Tilray is paying for Natura Naturals. So is Aurora getting a lot more production capacity? Um, no.
Whistler has two production facilities, one of which is fully operational. When the second facility reaches its full capacity, these two facilities will produce a little more than 5,000 kilograms of cannabis annually. Although Aurora thinks that Whistler's second facility will be ready to run this summer, there's no guarantee, considering Health Canada's licensing backlog -- and the company didn't structure the deal to reflect the uncertainty.
Granted, Whistler's organic products command a nice premium over nonorganic cannabis products. However, the math simply doesn't add up to justify the price tag that Aurora is paying for the small company.
It seems that Aurora paid an enormous amount just to get the Whistler brand. Aurora said that Whistler's "iconic brand...resonates strongly across Canada and international markets." But it's debatable whether the Whistler brand will add significant value for Aurora outside of Canada.
Unlike Tilray, Aurora is funding its deal entirely with stock. Also unlike Tilray, Aurora didn't mention seeking any outside advice about the fairness of the price that it's paying for its acquisition.
My view is that it's pretty clear that Tilray's management team has executed a smarter strategy than Aurora Cannabis' management team has. I get that Aurora felt that it had to play catch-up and went on a buying spree to rapidly boost its capacity. However, some of its deals haven't seemed to be fully thought out.
I think that Tilray, by comparison, has been pretty shrewd in the deals made so far. And I'm not only referring to acquisitions. The company's partnership with Authentic Brands Group (ABG), for example, to market consumer cannabis products under ABG's brands such as Nine West and Prince looks like a good long-term strategic move.
There's an old saying that you should bet on the jockey and not the horse. At least right now, the jockeys at Tilray appear to be outriding the jockeys at Aurora Cannabis. In my view, that makes Tilray a more attractive marijuana stock than Aurora Cannabis over the long run.
Having said that, I don't think that Tilray is the best marijuana stock to buy. Its share price is still expensive, especially considering Tilray's lower production capacity than several of its peers. Tilray appears to be better at dealmaking than Aurora Cannabis, but there are better deals to be found than Tilray right now.