For years, marijuana has been among the fastest-growing industries. Between 2014 and 2018, legal weed sales more than tripled between 2014 and 2018 to $10.9 billion, with various Wall Street estimates calling for at least $50 billion in annual worldwide pot sales by 2030.
This rapid growth was the impetus behind the rise in cannabis stock valuations, as well as the catalyst that led to a wave of marijuana acquisitions throughout 2018 and the first half of 2019. However, as investors have come to learn, most of these acquisitions were grossly overpriced -- none more so than Aurora Cannabis' (ACB 12.87%) deal to buy Ontario's MedReleaf, which closed in July 2018.
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This is, hands down, the worst cannabis deal of all time
Not counting equity investments, such as Constellation Brands taking a stake worth $4 billion in Canopy Growth (CGC 20.65%) in Nov. 2018, Aurora's all-stock purchase of MedReleaf, totaling 2.64 billion Canadian dollars ($2.03 billion U.S.), is the largest acquisition to have been completed in the marijuana space. But we've come to learn just how incredibly overpriced this deal was, relative to what Aurora received.
The expectation had been that Aurora's acquisition of MedReleaf would boost its peak annual production capacity by a minimum of 140,000 kilos, if not north of 250,000 kilos. It acquired two of MedReleaf's existing cultivation farms -- the 210,000-square-foot Bradford facility, which is capable of 28,000 kilos per year, and the 55,000-square-foot Markham campus, capable of 7,000 kilos year. It also inherited the Exeter vegetable-growing greenhouse, which was to be retrofit to grow cannabis. At 1 million square feet, it was estimated to yield 105,000 kilos of cannabis per year. Additionally, 95 acres of adjacent land was also acquired with the Exeter facility, providing MedReleaf (and then Aurora, following the buyout) the opportunity to construct another facility that was 1.5 times the size of Exeter.
On paper, this acquisition seemed transformative. However, we learned this past week just how egregiously Aurora overpaid for MedReleaf.
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With Aurora Cannabis facing a bit of a cash crunch, the company announced on Monday, Jan. 6, that it was putting its Exeter facility up for sale for the low, low price of CA$17 million. Interestingly, it's not even clear if the company will get its ask of CA$17 million considering how most major growers have reduced peak production estimates and idled construction projects.
This sale is a slap in the face on multiple accounts. For one, MedReleaf paid about CA$26 million in a cash-and-stock deal to acquire Exeter and its adjacent acreage. Aurora may wind up selling the facility and its land for at least a 35% discount to what MedReleaf paid for it. And this assumes that Aurora never put a dime into the facility, which is unclear at this point.
Furthermore, this sale reduces peak production estimate for the MedReleaf acquisition from at least 140,000 kilos to just 35,000 kilos from the two existing cultivation farms. To add some context to this, Flowr and Supreme Cannabis Company both have about 50,000 kilos of domestic peak annual production capacity, and their respective market caps are currently $172 million and $145 million. Aurora paid more than $2 billion for MedReleaf!
In addition to the more than one dozen other acquisitions Aurora Cannabis has completed over the past 3.5 years, the company's balance sheet has ballooned to recognize CA$3.17 billion ($2.43 billion) in goodwill. This represents 57% of the company's total assets, and it's considerably larger than Aurora's current market cap (as of Wednesday, Jan. 8) of $2.04 billion. In other words, the Exeter sale all but assures that Aurora Cannabis will take a massive writedown in the not-so-distant future.
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Don't worry Aurora, you're not alone
Although Aurora Cannabis stands out as being particularly awful at properly valuing its acquisitions, it's certainly not the only pot stock that deserves a finger wag. In fact, I'm not certain there's been a single deal conducted in the cannabis space over the past two years where the acquirer hasn't overpaid. A quick look at rising goodwill levels on marijuana stock balance sheets confirms this.
The aforementioned Canopy Growth, the largest pot stock by market cap, has been a pretty avid acquirer as well. According to its balance sheet, as of its most recent quarter, Canopy had CA$1.91 billion in goodwill, which accounts for 23% of the company's total assets. What's worrisome is that this percentage continues to climb, which is primarily the result of the ongoing decline in Canopy's cash balance due to its massive operating losses.
Aphria (APHA) has been another culprit, with almost CA$670 million in goodwill recognized on its balance sheet as of its most recent quarter. Much of this derives from Aphria's purchases of Nuuvera and its Latin American assets in 2018. What's particularly noteworthy about Aphria is that it's already taken a CA$50 million writedown on its Latin American acquisition, and yet still has 28% of its total assets tied up in goodwill.
The point is that marijuana stocks have done a very poor job of evaluating their purchases, and it's shareholders who are going to pay the price, with writedowns looking like a near certainty for a number of major producers. Of course, no cannabis company may ever top Aurora's buyout blunder.
