Aurora Cannabis’ (TSX:ACB) newly announced acquisition of licensed cannabis producer MedReleaf Corp (TSX:LEAF) vaults Aurora to top spot on the leaderboard, as companies continue to jockey for position in the lead-up to rec legalization. But the move is about more than just bragging rights, says well-known investor Brett Wilson, who claims that it’s a clear case of consolidation at its finest.
Yesterday, news broke of what should be considered the largest acquisition yet in the marijuana space, as Edmonton-based Aurora Cannabis entered into an agreement to buy all shares in Markham, Ontario-based licensed producer MedReleaf for $3.2 billion. The deal would catapult Aurora past Canopy Growth Corp (TSX:WEED) as the largest pot company in Canada, with a combined market capitalization of $7 billion.
“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,” said Terry Booth, CEO of Aurora, in a press release. “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.”
Wilson says that the deal will serve Aurora well in preparation for rec legalization. “The upward trend in the market is obvious as we get closer to the July/August/September full legalization,” says Wilson, chairman of Canoe Financial, to BNN Bloomberg. “We’d been hearing rumours of the MedReleaf deal for a while, obviously they’ve been working at it and the market has been pretty positive in its response to the deal.”
“MedReleaf represents one of the better brands and certainly one of the better recognized LPs, so it’s consolidation at its finest,” he says. “Operating costs are going to continue to come down and they’ve gotta keep their overhead managed. This is a chance to grow production into an exciting time in recreational cannabis.”
Last week, Aurora announced its third quarter of fiscal 2018 financial results, posting revenue of $16.1 million, up from Q3 of FY17 at $10.9 million and a 16.5 per cent increase in total cannabis production compared to the previous quarter. At the same time, the company saw its cash costs per gram of cannabis rise to $1.53, up nine per cent on the quarter.
Wilson says that while profits are likely still two or three years away for Canada’s pot companies, he believes that once the marijuana market gets established, it will be much bigger than current estimates.
“I believe that the fundamentals, the forecast that are being used to judge the size of the market (and it’s anecdotal evidence) but I think they’re missing it by probably a double,” he says. “The market is much greater than anyone is forecasting. The percentage of the population that is using, that is interested in using, that’s willing to use or is curious about using is far greater than ever forecast.”