What This 3-Way Megamerger Could Mean To Marijuana Stocks

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“You can catch more flies with honey than with vinegar.”

Aurora Cannabis appears to be testing out the old proverb. The Canadian marijuana grower’s “fly” is CanniMed Therapeutics. Aurora announced plans for an unsolicited acquisition of CanniMed a couple of months ago. To say that CanniMed wasn’t happy with the move is a huge understatement.

CanniMed decided to make its own acquisition of another medical-marijuana grower, Newstrike Resources. Aurora publicly slammed the potential deal with Newstrike, calling CanniMed’s proposed purchase price “hard to fathom.”

Now, it appears the fathoming might be much easier: Reuters reported that Aurora is in discussions to buy both CanniMed and Newstrike. This three-way megamerger would obviously be huge for the companies directly affected, but could it also be important for marijuana stocks in general? Absolutely.

Why such theatrics?

It’s easy to understand why Aurora wants CanniMed. Canadian marijuana growers are selling everything they can produce right now in a rapidly growing domestic medical-marijuana market. In addition, Aurora bought Pedanios GmbH to gain a foothold in the German medical-marijuana market. But the biggest opportunity of all awaits — legalization of recreational marijuana in Canada.

The reality is that marijuana growers want to increase capacity as much as they can to meet anticipated heavy demand for recreational marijuana. One way to increase that capacity is to build more facilities. Aurora is doing that. The other way to increase capacity is by acquiring other marijuana growers. And Aurora is doing that as well.

CanniMed makes for an appealing target. It currently has two production facilities, one in Saskatchewan and another in Michigan. The Saskatchewan facility has annual growing capacity of 7,000 kg of cannabis.

Why wasn’t CanniMed open to having Aurora purchase it? The company’s management had several objections, but the chief issue was money. CanniMed executives thought their company should be worth more. The market seems to agree, driving CanniMed stock much higher in recent weeks than Aurora’s initial offer.

Potential impact to players — big and small

Aurora Cannabis is now reportedly willing to pay a higher price tag for CanniMed and buy NewStrike Resources as part of the deal. If the three companies merge, the combined entity would likely have a market cap close to that of the current largest marijuana grower, Canopy Growth.

For CanniMed and NewStrike shareholders, the scenario is unfolding nicely. These investors could realize tremendous gains if a deal is finalized. They could also end up owning a solid chunk of stock in Aurora Cannabis, which could see even bigger gains than it’s already racked up if everything stays on track with Canadian legalization of recreational marijuana.

Of course, for Aurora Cannabis shareholders, the devil’s in the details. The company should certainly benefit from expanded production capacity. But if the cost is perceived as too high to obtain that extra capacity, Aurora stock could take a hit.

What will be interesting to see is what happens in the aftermath of a potential Aurora/CanniMed/NewStrike merger. Canopy Growth has been scooping up smaller marijuana growers and forging partnerships to add capacity. It’s possible that the company could accelerate these efforts with a much larger rival to face. I also wouldn’t be surprised if next-tier marijuana growers seriously consider mergers to better position themselves against Canopy and a larger Aurora.

Smaller marijuana stocks could be the biggest beneficiaries of Aurora’s acquisition — outside of CanniMed and NewStrike, of course. It’s not a stretch to envision a frenzy of acquisitions greater than what has already happened in the Canadian cannabis industry.

But what if the deal falls apart?

From the outside looking in, it seems that a deal between Aurora and CanniMed is more likely than ever. The two companies are actually talking to each other instead of at each other now. That’s significant progress. However, the talks between Aurora and CanniMed could fall apart. What then?

Expect CanniMed stock to drop immediately. NewStrike stock could suffer an even bigger loss. Aurora Cannabis’ share price could pull back with a blown deal as well. But that would all be temporary.

I have maintained that 2018 should be the biggest year ever for marijuana stocks, especially those of Canadian marijuana growers. As long as the schedule for legalizing recreational marijuana in Canada doesn’t slip, I fully expect the stocks to move higher. And, yes, I’m completely aware of these stocks’ stratospheric valuations.

My hunch is that Aurora Cannabis will find the old proverb is true, and that it will catch some flies with honey. And for investors in these and other Canadian marijuana stocks as well, the deal could prove to be quite sweet indeed.