Lessons from Aurora Cannabis’ bought deal financing

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Edmonton, Alberta-based Aurora Cannabis has arranged new financing via a “bought deal.”

What is that, and is it important to all cannabis entrepreneurs or just the large operators?

Let’s take the deal apart to find out.

Aurora has a current market cap of about $400 million. Its trailing, 12-month revenue was $225 million; it bled out $1.2 billion on its bottom line.

The financing, with gross proceeds of about $172.5 million, was arranged by Canaccord Genuity and BMO Capital Markets.

The syndicate (or group of financiers) agreed to buy 61.2 million special “units” – plus another 9.2 million through an over-allotment option – priced at $2.45 each. Each unit will include one common share and one warrant.

A “warrant” is a tradable security that entitles its owner to buy stock during a set period for a prearranged price; in this case, three years and $3.20 a share.

If this trace of financial applesauce sounds familiar, it’s because a warrant acts and works a lot like a call option.

As a rule, investors buy call options on stocks that they believe will move higher. They’re a bull ish bet. The difference? Investors enter into options contracts. Companies offer warrants in unit packaging such as this as a sweetener.

Well, it worked.

Investors bought the units. But the deal, which will provide cash for general corporate purposes, hurt Aurora’s stock: The day before the deal, its shares closed at $2.73. After word of the arrangement hit Wall Street, the company shed 38.5% of its value, closing at $1.68. Shares have rebounded only a smidgen since.

The warrants have no value unless the market price of the stock rises.

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In the short term, this deal is most important to the larger operators, or aggressive, risk-tolerant investors, but smaller operators can focus on two key takeaways:

  • Creative financing is available to cannabis companies, even flagging ones.
  • This is a bit of a thought exercise, but … If a large company such as Aurora must add a significant sweetener to interest investors, what are smaller companies able to offer as incentives to their potential investors? In this environment, simply offering shares isn’t enough.

The industry’s business case, at least as judged by profitability, remains unproven. Companies that can achieve results in the black have the best chance.

Andy Obermueller can be reached at editorial@mjbizdaily.com.