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Why Marijuana Stocks Popped Wednesday

By Rich Smith – Jul 15, 2020 at 2:29PM

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Aphria and Aurora Cannabis aren't merging after all. Analysts think that's still good news.

What happened

Shares of leading Canadian cannabis stocks Aurora Cannabis (ACB -1.64%), Aphria Inc. (APHA), and Canopy Growth (CGC 4.41%) popped in early trading Wednesday. The move followed a report by BBN Bloomberg that Aurora and Aphria had recently discussed a possible merger, but that those talks broke down last week.

Investors are snapping up marijuana stocks today anyway, though. In afternoon trading, Aurora shares are selling 3.7% higher as of 1:05 p.m. EDT, Aphria is up 4.8%, and even Canopy -- which is not involved in the buyout talks at all -- is up 3.3%.

Marijuana plants

Image source: Getty Images.

So what

Apparently, talks got hung up on negotiations regarding who would run the merged entity (the composition of the board of directors) and salaries for senior executives.  

Those seem like items that could be worked out in a future merger attempt, however. Meanwhile, the broad outlines of the merger would have seen Aphria shareholders take control of 51% of stock in the merged company in an all-stock buyout, with Aurora shareholders getting the remaining 49%. The parties had also identified about $200 million worth of costs that could be reduced in a combined entity through synergies.

And of course, if completed, the merger would have created a "global cannabis behemoth" (says BBN Bloomberg) worth 3.5 billion Canadian dollars ($2.6 billion) doing nearly $800 million in annual sales across 25 countries, potentially giving the company enough scale to shore up sinking profit margins.

Now what

That prospect should prove attractive to cannabis companies -- and cannabis investors as well -- perhaps leading to a revival of merger talks between Aurora and Aphria at a later date. Or between Canopy Growth and Aurora. Or between Canopy and Aphria. Or between other players in the global marijuana market, for that matter.

In short, now that the idea of creating a marijuana super-company has been raised, it's unlikely to disappear. Investors are betting that someone, somewhere will find a way to make a merger happen, and that once someone succeeds in making it happen, this will be good news for investors in marijuana stocks.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Canopy Growth Stock Quote
Canopy Growth
CGC
$2.84 (4.41%) $0.12
Aurora Cannabis Stock Quote
Aurora Cannabis
ACB
$1.20 (-1.64%) $0.02
Aphria Stock Quote
Aphria
APHA

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