Although there are dozens of marijuana stocks for investors to choose from, none is arguably more polarizing than Aurora Cannabis (NYSE:ACB).
Aurora's growth-at-any-cost strategy has come with promise and peril. Although this is a company with a number of organic construction projects, including the completed 800,000-square-foot Aurora Sky build, and the ongoing buildout of Aurora Sun, a 1.2-million-square-foot complex in Medicine Hat, Alberta, Aurora has chosen to primarily grow via acquisition.
Since the beginning of 2018, Aurora's most notable purchases include CanniMed Therapeutics for around $850 million, MedReleaf for close to $2 billion, ICC Labs for roughly $200 million, and most recently Whistler Medical Marijuana for $130 million. This added branding, capacity, and infrastructure has allowed the company to push into 24 countries, and has put it on track for what yours truly estimates will be an industry-leading 700,000 kilograms of peak annual production. By comparison, only Canopy Growth, which has 5.6 million square feet set aside from cultivation, is even within a stone's throw of what Aurora brings to the table from a production standpoint.
Aurora would appear to be hitting on all cylinders. Having top-notch output, along with an above-average yield per square foot, should help the company secure lucrative long-term supply deals domestically and abroad. Additionally, if (but most likely when) dried cannabis flower production in Canada becomes oversupplied and commoditized, these foreign sales channels will prove to be operating margin lifesavers for the company.
Yet Aurora is missing something that practically all of its larger peers have experienced: the joy of landing a brand-name partnership. Canopy Growth has received three separate equity investments from Modelo and Corona beer producer Constellation Brands, the last of which tallied $4 billion. Meanwhile, Cronos Group closed its $1.8 billion equity investment from tobacco kingpin Altria. Then there's Tilray, which expanded an existing non-combustible medical cannabis product distribution agreement with Novartis' subsidiary Sandoz to the global scale, as well as formed a $100 million joint venture with Anheuser-Busch InBev.
However, things finally changed this past Wednesday, March 13, when Aurora Cannabis landed itself a partner...sort of.
Aurora finally nabs a "partner"
Before the opening bell, Aurora announced that it had hired Nelson Peltz, billionaire activist investor and founder of Trian Fund Management, as a strategic advisor. The press release notes that Peltz will work with Aurora to "explore potential partnerships that would be the optimal strategic fit for successful entry into each of Aurora's contemplated market segments." Peltz is also there to advise on the company's international expansion strategy.
The move, and reaction from Wall Street, does make sense to some degree. Peltz has a history of being a shareholder advocate and focusing his efforts in the food and beverage space. With Health Canada aiming to legalize edibles and nonalcoholic cannabis-infused beverages before the one-year anniversary of Canada's adult-use legalization (Oct. 17), Aurora would be wise to have a strategy in place within the food and beverage industry to take advantage of this purportedly high margin space.
For example, even though Peltz is no longer on the board of directors for Mondelez International (NASDAQ:MDLZ), a position that has since been filled by Trian President Peter May, Peltz's fund still owns more than 18.8 million shares (about 1.3% of all outstanding shares) in the snack company. Mondelez is the company behind Chips Ahoy, Oreo, and Ritz crackers, to name a few of its best-known brands. Hypothetically speaking, a tie-up between Mondelez and Aurora would make sense, and would be significantly easier to fine tune, with a member of Trian already on Mondelez's board.
In exchange for his services, Aurora will be granting Petlz nearly 20 million options at a price of $10.34 Canadian. The options will be vesting over the next four years on a quarterly basis and will, essentially, amount to an additional dilution of Aurora's existing share count of about 2%.
Don't get too excited
As exciting of a partnership as this is for Aurora Cannabis and its investors, there are two sides to every coin. As my colleague Dan Caplinger describes, the price the company is paying for Peltz might mean less-than-stellar returns for investors. The company's loose issuance of its common stock to facilitate deals -- Aurora has issued 1 billion shares since June 2014 -- could dilute existing shareholders.
But the bigger worry might be that Peltz's track record isn't as impressive as you might think. For instance, Peltz proved unsuccessful in his attempts to get PepsiCo (NYSE:PEP) to separate its snack business from its beverage operations, despite a two-year fight to do so. PepsiCo's CEO at the time, Indra Nooyi, was quoted as telling Fortune that "we don't need activists to tell us what to do." Ultimately, PepsiCo wound up implementing a marketing strategy that better tied its Frito-Lay snack business into its beverage division, enticing customers to purchase both, rather than one or the other. In May 2016, it was disclosed that Trian had sold its stake in PepsiCo.
In October 2015, Trian acquired a $2.5 billion stake in industrial conglomerate General Electric (NYSE:GE) at $26 per share. At the time, it was Trian's largest investment in the funds' history. Peltz wanted to push for General Electric to explore share buybacks by taking on new debt, to be more disciplined with acquisitions and, at the time, to look for ways to scale back its GE Capital exposure. Today, General Electric has been jettisoned from the Dow Jones Industrial Average, and its share price is down nearly two-thirds from where Trian first purchased shares. To say that it's been a disaster would be an understatement.
The point being that Peltz is fallible, and his activist role hasn't necessarily resulted in Trian getting what it wants, or even shareholders making money. There's no doubt his knowledge of the snack and beverage space via PepsiCo and Mondelez will come in handy for Aurora and its long-term strategy, but there aren't any guarantees that Peltz's advisory role will create value for shareholders at this point.