CanniMed shareholders should take a pass on Aurora Cannabis bid, Echelon says

Echelon Wealth Partners analyst Russell Stanley thinks the Aurora Cannabis (TSX:ACB) hostile bid for CanniMed Therapeutics (TSX:CMED) isn’t compelling enough for the latter’s shareholders.

On Friday, Aurora Cannabis announced a takeover bid for CanniMed Therapeutics. Under the terms of the proposal CanniMed shareholders would receive 4.53 shares of Aurora for each share they hold. to a maximum of $24.00 in Aurora shares.

“We are excited to be able to present this offer to CanniMed’s shareholders,” Aurora Cannabis CEO Terry Booth said. “We are confident that they will find the significant premium we are offering on CanniMed’s shares is highly attractive, and is amplified by the opportunity to participate in the growth of the combined company through Aurora’s common shares. Our ability to unlock value is one of the driving forces behind our offer, as we believe that we will be able to accelerate CanniMed’s growth more effectively than current management, and so we invite and encourage CanniMed’s shareholders to tender their shares to the bid.”

Stanley thinks this bid isn’t good enough and recommends CanniMed shareholders pass on it.

“We recommend against tendering to the offer at this point, particularly given that it is an all stock offer that caps the potential value payable to CMED shareholders without providing a floor,” the analyst explains. “Additional potential catalysts include improved financial results, expansion updates, and international initiatives.”

In a research update to clients today, Stanley maintained his “Speculative Buy” rating and one-year price target of $22.00 on CanniMed Therapeutics, implying a return of seven per cent at the time of publication.

Stanley thinks CanniMed will generate Adjusted EBITDA of negative $1.9-million on revenue of $16.7-million in fiscal 2017. He expects those numbers will improve to EBITDA of positive $5.8-million on a topline of $42.1-million the following year.

Stanley says the potential for a share price higher than his target on CanniMed is a real possibility.

“While our target price represents a modest return-to-target of 7%, we note that our formal estimates leave considerable upside potential for capacity expansion and product/revenue mix improvement,” he says.