Aurora Cannabis to buy MedReleaf in all-stock deal worth $3.2 billion

Aurora Cannabis gobbling up competition The Canadian company is acquiring Medreleaf in a $3.2 billion stock swap.

TORONTO -- Aurora Cannabis Inc.'s $3.2 billion all-stock offer to take over rival licensed marijuana producer MedReleaf will create what the target company's CEO described as the "undisputed world leader in cannabis" and the largest-ever deal in Canada's burgeoning cannabis industry.

If approved, the deal announced Monday will create a cannabis behemoth capable of producing more than 570,000 kilograms of marijuana per year, a significant portion of projected demand as the country moves to legalize recreational pot in the coming months.

The companies' combined production capacity totals more than two-thirds of the roughly 800,000 kilogram annual domestic cannabis demand in 2019, as estimated by CIBC analysts in a report earlier this month.

However, the acquisition of MedReleaf is about more than just the Canadian market --it is a global play to scale up and capitalize on the larger international medical marijuana opportunity, said Aurora's chief executive Terry Booth.

"This deal checks every box," he said at a press conference in Toronto. "We're leaders in every box now, and we're not looking back and we're not going to stop here."

Neil Closner, the chief executive of Markham, Ont.-based MedReleaf, said the takeover gives its shareholders an immediate premium and an opportunity for upside.

The offer implies a price of $29.44 per MedReleaf common share, 18 per cent above its Friday closing price of $24.90.

"This combination makes the two of us now the undisputed world leader of cannabis," he said at the joint press conference.

Edmonton-based Aurora and MedReleaf had confirmed on May 3 they were in discussions after media reports speculating that a deal was in the works, but said they had no agreement at the time.

After the announcement Monday, shares of MedReleaf were up as much as seven per cent on the Toronto Stock Exchange in morning trading but, by mid-afternoon, were up roughly one per cent at $25.18. Shares of Aurora rose by nearly three per cent on Monday morning, but by mid-afternoon its stock was down by roughly two per cent to $7.89 in Toronto.

Vahan Ajamian, an analyst with Beacon Securities, said this was the biggest deal in the Canadian cannabis sector yet and could push other rivals to beef up their presence.

"MedReleaf's shareholders will be getting a healthy premium," he said in a note. "We believe this development will spark (merger and acquisition) enthusiasm across the sector."

The deal is the latest sign of consolidation in Canada's cannabis sector.

Aurora has been particularly active.

It recently completed its $1.1-billion acquisition of Saskatoon-based licensed producer CanniMed, previously the biggest deal in the sector. Aurora and CanniMed struck a stock-and-cash deal in January after an at-times terse takeover battle.

Aurora's rivals have been acquisition hungry too. In February, licensed producer Aphria Inc. completed its acquisition of B.C.-based Broken Coast Cannabis Inc., a transaction valued at more than $200-million in stock and cash.

GMP Securities analyst Martin Landry said Aurora's pace of acquisitions is "extremely fast" and could have negative consequences.

"The integration of another major acquisition in such a short time frame could be challenging, putting a strain on management and a distraction on the daily operations," he said in a note to clients.

Booth said Monday the nascent cannabis industry is scaling up at a rapid pace and Aurora needed to act fast.

"If we don't do this now, we'd be doing this later at a higher price," he said at the press conference.

If the friendly deal is completed, current shareholders of Aurora would own 61 per cent of the combined company and MedReleaf shareholders would own about 39 per cent.

The combined company would have a market capitalization of roughly $7.44 billion, surpassing that of Canopy Growth Corp., which has long been the largest Canadian licensed producer by market value.

Meanwhile, Canopy announced separately on Monday that it has a non-binding agreement to buy the remaining 33 per cent stake of BC Tweed Joint Venture Inc. in return for up to $374 million worth of its shares. Canopy also announced it has applied to list its common shares on the New York Stock Exchange.

Booth told reporters on Monday that Aurora too would consider listing in New York, in order to access the larger U.S. investor base, and that there were still more opportunities for acquisitions ahead.

The combined entity will have nine production facilities in Canada and two in Denmark as well as distribution agreements with Alcanna liquor stores in Alberta, SAQ provincial liquor stores in Quebec, Pharmasave and Shoppers Drug Mart.

The boards of both companies have approved the transaction but the deal requires approval by at least two-thirds of MedReleaf shareholders and a simple majority of Aurora shareholders.

Aurora is aiming for completion of the deal by August.

The agreement includes a break fee of $80 million if the transaction is terminated under certain circumstances. As well, the deal's provisions allow for MedReleaf or Aurora to accept a superior proposal in certain circumstances, and both will have five business days to match it.

Landry said the likelihood of a superior bid emerging is low, given the deal's size and the strong support of MedReleaf's shareholders.

"We do not believe that Canopy Growth Corporation will make an offer for MedReleaf as Canopy appears to have enough domestic capacity to capture a leading share of the recreational market."