Aurora deepens ‘premium’ cannabis focus via CA$38M TerraFarma acquisition

Aurora Cannabis reached a deal to buy TerraFarma, the parent company of craft producer Thrive Cannabis, in a bid to reinforce its “premiumization” strategy and become profitable by the spring of 2023.

Alberta-based Aurora Cannabis has agreed to pay at least 38 million Canadian dollars ($30 million) in cash and stock for all of TerraFarma’s issued and outstanding shares, according to a news release.

The deal includes two potential earnouts of up to CA$10 million for near-term revenue targets and up to CA$20 million for longer-term targets.

It’s also the latest example of a large cannabis company snapping up a smaller, more focused marijuana producer.

Some recent examples include:

• British Columbia-based Village Farms International buying Quebec licensed producer and distributor Rose LifeScience for up to CA$46.7 million.
• New Brunswick-headquartered Organigram Holdings acquiring Quebec producer Laurentian Organic in a deal worth at least CA$36 million.

Thrive Cannabis, based in Simcoe, Ontario, specializes in premium-quality, small-batch craft cannabis flower and concentrates.

Thrive, which is privately owned, opened the first farm-gate cannabis store in Ontario at its indoor and outdoor production site in Jarvis.

Since becoming CEO in September 2020, Miguel Martin has pivoted Aurora’s business model away from value-priced cannabis, a hypercompetitive segment that has experienced drastic price and margin compression.

Aurora has sold off, or is in the process of doing so, its biggest cultivation facilities that led to billions of dollars in losses.

Martin has steered the company to focus more on medical cannabis and premium adult-use products, two segments that have better margins and more loyal customers.

In a conference call with analysts one year ago, Martin elaborated on Aurora’s strategic pivot to premium products.

“Achieving this goal will require alignment with production, focusing our resources on growing high-potency, high-terpene, premium cultivars on a consistent basis and reaching consumers who are willing to pay a premium for a premium product,” he said at the time.

Aurora expects its acquisition of TerraFarma to close in the fourth quarter and contribute positive EBITDA, a measure of profitability, and support its goal to reach profitability in the first half of fiscal 2023.

“This transaction supports our path to profitability while ensuring that we are strategic in our M&A activity,” Martin said in a statement.

“Thrive’s achievement of positive standalone EBITDA, combined with their exceptional operational and brand capabilities, truly set them apart, and we look forward to leveraging their expertise as we embark together on Aurora’s path to profitability.”

While some of Aurora’s competitors engaged in high-stakes mergers and acquisitions, which came at a high cost and resulted in crashing market share, Martin has adopted a more conservative approach.

For instance, Hexo Corp. bought a number of rival producers in 2021 that resulted in the Quebec-based company losing its financial footing and replacing most of its management.

Analysts were neutral on Aurora’s deal for Thrive.

“We like Thrive’s positive EBITDA and focus on the premium segment; however, we are wary of Thrive’s relatively flat market share and the price paid by ACB for a niche player which may have difficulties scaling,” ATB Capital Markets analyst Frederico Gomes wrote in a note to investors.

“We like Thrive’s focus on premium, higher-margin and consumers want higher THC cannabis, and EBITDA profitability. We also like that (Aurora) is refocusing on the rec. market with Thrive’s leadership team, which can help drive improvements in cultivation and product development.”

Shares of Aurora trade as ACB on the Toronto Stock Exchange and the Nasdaq.

Matt Lamers can be reached at mattl@mjbizdaily.com.