Darren Gleeman (Courtesy photo)
In its push to absorb multinational MMJ firm Aurora Cannabis, marijuana multistate operator Curaleaf Holdings claims its initial $272 million hostile takeover bid is worth approximately $4 per share – or a 45% premium above Aurora’s 30-day average trading price for shareholders.
Aurora’s board rejected Curaleaf’s offer unanimously and is urging shareholders to follow suit.
I understand why.
What does Curaleaf’s takeover bid offer Aurora Cannabis shareholders?
First, this is not a $4 cash offer. Aurora shareholders would receive $0.75 in cash and 0.3463 Curaleaf subordinate voting shares for each Aurora share.
When Curaleaf announced the bid, that package was worth approximately $4. But its value changes with Curaleaf’s stock price, which during trading Thursday afternoon was hovering around $10.09 per share on over-the-counter markets.
Despite announcing intentions to uplist to a major exchange in May, Curaleaf remains listed on OTC.
If Curaleaf’s stock falls, Aurora shareholders receive less. If Curaleaf’s stock rises far enough, the exchange ratio is reduced so that the total consideration does not exceed $5 per share.
Aurora shareholders are exposed to the decline, but their upside stops at $5.
The cash portion deserves a closer look.
How much is Curaleaf’s bid for Aurora Cannabis really worth?
Curaleaf would pay approximately US$51 million in cash to Aurora shareholders.
As of June 30, Aurora had $69.3 million (Canadian) in cash and cash equivalents and C$30.7 million in short-term investments.
That is C$100 million, or approximately $72 million in U.S. dollars using the exchange rate in Curaleaf’s offer.
Aurora also had C$49.1 million of restricted cash, bringing the total to C$149.1 million, or approximately $109 million in USD.
Aurora expects roughly C$46.4 million of that restricted cash to become unrestricted during its third fiscal quarter.
Curaleaf still has to fund the $51 million USD payment at closing. It cannot use Aurora’s bank account before it owns the company.
But after closing, it would control a company holding more cash and short-term investments than Curaleaf paid out in cash, even if the restricted cash is excluded.
And cash is not all Curaleaf would be acquiring.
Is Curaleaf’s bid for Aurora Cannabis about cash or market position?
Aurora has built an international medical cannabis business with EU-GMP certified cultivation and manufacturing operations and access to markets that are difficult and expensive to enter.
These assets took years to assemble, and could end up being a workaround to entering the U.S. once reform advances.
Curaleaf is offering Aurora shareholders cash plus stock in exchange for that platform, Aurora’s balance sheet and Aurora’s future growth.
The stock being offered also comes with limited voting power.
According to Aurora’s circular, its shareholders would own approximately 7.7% of the combined company but hold only approximately 3.2% of the votes. Curaleaf’s multi-voting share structure gives insiders voting rights far beyond their economic ownership.
Aurora shareholders would surrender a company they currently vote on for a minority position with considerably less influence.
They would also be moving into a more leveraged company.
Aurora describes itself as debt-free, although its financial statements list C$22.7 million of lease liabilities. Curaleaf has more than $1 billion of debt, financial obligations and lease liabilities, according to Aurora’s analysis.
Who wins out if Curaleaf takes over Aurora Cannabis?
None of this means the combination itself is a bad idea. Curaleaf would gain Aurora’s international medical cannabis platform, and Aurora shareholders would own part of a larger company. There may be real operating and strategic benefits.
The question is who gets paid for those benefits.
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Under the current offer, Curaleaf would acquire Aurora’s operations and liquidity while Aurora shareholders receive mostly Curaleaf stock. They would take on Curaleaf’s stock-price risk and leverage, give up voting power and participate in the upside only until the offer reaches $5.
A better offer could increase the cash payment, remove the $5 ceiling, add protection if Curaleaf’s stock falls, or improve the exchange ratio. Curaleaf could also offer some combination of those changes.
Should Curaleaf bid more for Aurora Cannabis to satisfy shareholders?
A 45% premium sounds substantial.
But the premium is measured against Aurora’s recent trading price, not against the value of its cash, international platform or future earnings.
If Curaleaf wants Aurora, it may have to write a larger check, give Aurora shareholders more of the upside – or both.
Darren Gleeman is the managing partner of MBO Ventures, a firm that specializes in business exits and Independent Buyouts through tax-advantaged ESOP structures.
