Aurora Cannabis: Dissecting Its Whistler Acquisition

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About: Aurora Cannabis Inc. (ACB), Includes: APHA, CRON
by: Cornerstone Investments
Summary

Aurora acquired Whistler for $175 million in an all-stock deal while Aphria acquired a similar asset, Broken Coast, for $230 million, with shares.

Whistler and Broken Coast are very similar assets with the same capacities, premium market focus, and are located four hours apart.

Despite the lower headline price, Aurora likely paid a similar valuation after taking into account the challenging M&A environment.

Aurora Cannabis (ACB) announced its $175 million acquisition of Whistler Medical Marijuana ("Whistler") on Jan. 14. This transaction reminds us of the deal back in January 2018 when Aphria (APHA) acquired Broken Coast, another West Coast licensed producer. Given the familiarities between the two assets, we thought it would be helpful to analyze the price paid by Aurora and the asset being acquired relative to Aphria's deal announced one year ago.

(All amounts in CAD unless otherwise noted)

Aurora - Whistler

As we wrote in "Aurora Cannabis Continues Its Shopping Spree in 2019," Aurora acquired Whistler for $175 million in an all-stock deal. Whistler is one of the first 10 licensed producers in Canada and focuses on growing strains targeting the premium segment of the cannabis market. The company sells its strains for prices that are 50% higher than the average prices in Canada and is expecting to maintain similar levels of premium pricing in the recreational market. The company has largely operated in British Columbia and Saskatchewan but has received product calls from Ontario, Alberta, and Manitoba. The company is ramping up its second facility and expects to reach a capacity of 5,000 kg/year by summer 2019. The existing facility is an indoor one and likely has a very small output.

Image result for wmmc whistler

It's worth noting that Cronos (CRON) holds a 21.5% stake in Whistler after investing again in a $75 million financing round in March 2017. It looks like Cronos will be selling its ownership to Aurora.

Aphria - Broken Coast

A very similar deal that came to mind is when Aphria acquired Broken Coast for $230 million on Jan. 15, 2018, almost exactly one year before Aurora's Whistler acquisition was announced earlier. Broken Coast is another small craft grower based in British Columbia that at the time operated a 26,000 sq. ft. indoor facility. Aphria announced that the facility was near completion of an expansion that will increase the facility to 44,000 sq. ft. with an output of 4,500 kg per year. Aphria also announced Broken Coast was planning a further Phase IV expansion to increase capacity to 10,500 kg per year.

It's worth mentioning that since Aphria completed the acquisition, the Phase IV expansion plan was scrapped due to design and location constraints so Broken Coast remained at 4,500 kg per year.

Comparison

The two acquisitions have many similarities and that's why we thought a comparison would make sense. First of all, both acquired companies were based in British Columbia, Canada. The map below shows that the two companies are only less than four hours away from each other.

Both companies also have a very similar size and production footprint. At the time of the announcement, Aphria said that Broken Coast was near completion of an expansion that will increase its capacity to 4,500 kg. For Whistler, Aurora said that the target will reach 5,000 kg capacity by summer 2019. So it seems like both companies had similar capacities at the time of the acquisition.

(Google Map)

Both companies also focus on producing premium cannabis strains that command higher selling prices in the market. For Broken Coast, we are seeing prices in the range of $11 to $12.50 per gram on its Website while Whistler had C$11 to C$14 per gram on its website. So it seems like that Aurora and Aphria acquired very similar assets in terms of the premium focus.

(Broken Coast Website)

(Whistler Website)

Lastly, it might be worth looking at the prices paid by both companies.

  • Aurora paid $175 million in an all-stock deal
  • Aphria paid $217 million in an all-stock deal by issuing 14.4 million shares at a deemed price of ~$15 - based on Aphria's current share price $8.80, the shares offered are worth $132 million

So it seems like Aurora paid a lower price using the price Aphria paid at the time of the announcement. We think it's best to compare prices paid based on share prices at the time of the deal announcement because that's what the negotiations were based off at the time. On the other hand, Broken Coast shareholders could have sold their Aphria shares at $15 per share excluding any lockups. Both companies have very similar small-scale production at 5,000 kg per year and both focus on the premium segment. However, it's also worth noting that the cannabis market has evolved at a fast pace since Aphria acquired Broken Coast one year ago. The licenses are no longer worth as much as they were one year ago as Health Canada handed out hundreds of licenses and more each day.

The cannabis M&A market in Canada also has cooled down significantly. The days of hostile takeover and bidding wars that came with crazy premiums are long gone. Instead, we are seeing the recently-announced deals with very low premiums and a few deals even fell apart after the announcement:

Looking Ahead

Both Aurora and Aphria acquired similar assets in their respective deals, however, the industry has changed a lot in the past year. Aurora paid a lower headline price than Aphria did but the M&A market also has cooled down significantly since from early 2018. We think Aurora most likely paid a similar valuation for Whistler compared to what Aphria paid for Broken Coast after taking into account the prevailing market condition.

For Aurora investors, the company has been showing signs of a slowdown in its M&A spree which is a good sign given its record of dealmaking. The company needs time to integrate the assets it has acquired, including the transformational acquisition of CanniMed and MedReleaf. We believe Whistler could shed some light on Aurora's future acquisition strategy by which it will focus on acquiring smaller producers that add specialized capabilities and unique product offerings to its existing operations. We don't think the company will pursue any other large-scale acquisition in Canada as it already controls 20%-30% of the Canadian recreational market based on last quarter's results. We think domestic execution and global expansion will become Aurora's primary focus going forward.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.