The proposed acquisition of MedReleaf (TSX:LEAF) by Aurora Cannabis (TSX:ACB) is, at first blush, a reasonable deal, Echelon Wealth Partners analyst Russell Stanley says.
This morning, Aurora announced it had signed a definitive arrangement agreement that will see it acquire MedReleaf for $3.2-billion, in an all-stock deal.
“This is a transformational transaction that brings together two pioneering cannabis companies, both committed to high-technology, high-quality and low-cost production, to create a powerful platform for accelerated growth and success on a global scale,” Aurora CEO Terry Booth said. “Our complementary assets, strategic synergies and strong market positioning will provide us with critical mass and an excellent product portfolio in preparation for the adult consumer use market in Canada. Equally, the combination strengthens our capacity to service the rapidly expanding global medical cannabis markets and amplifies our early-mover advantage. We are very excited about the combination of our respective science and R&D teams, which will position us exceptionally well for the development of high-value-added products, addressing as yet unmet needs in the medical markets and driving continued innovation for the adult consumer use market.”
Stanley says the premium here won’t blow anyone away, but it does appear to make sense.
“We are maintaining our rating and target price, pending the filing of a formal information circular, but at first glance, the purchase terms value LEAF at a level that is in the range of our 12-month target price,” the analyst says. “This is a 16% premium over the last closing price for LEAF, and while that might appear modest, we note that LEAF has been the top performing cannabis stock in our tracking group over the last month, with a return of 48% vs. the adjusted group average return of 8%.”
In a research update to clients today, Stanley maintained his “Speculative Buy” rating and one-year price target of $32.50 on MedReleaf, implying a return of 26 per cent at the time of publication.
Stanley thinks there is a high likelihood that this deal goes through to completion.
“Both boards have unanimously approved the terms of the transaction,” the analyst notes. “Closing also requires approval of 2/3 of voting LEAF shareholders, with holders of 56% of LEAF’s outstanding stock having entered irrevocable hard lock-up agreements to support the transaction. Completion will also require simple majority approval from voting ACB shareholders, regulatory approvals, and other customary conditions. Upon completion, two of LEAF’s directors (Ms. Norma Beauchamp and Mr. Ronald Funk, both independents) are to join ACB’s board. The agreement contemplates reciprocal $80M termination fees under certain circumstances, and a $15M expense reimbursement fee if the transaction is terminated under other specified circumstances.”