Aurora Cannabis (TSX:ACB) may be making waves these days with its high profile acquisitions, but can the company pull it all together come rec legalization? The jury is still out, but there’s a lot to worry about, says Frank Mersch, chief strategist with Jamekk Capital Management, whose company is shorting ACB.
Earlier this week, licensed producer Aurora Cannabis announced an agreement to purchase cannabis research and product testing company Anandia Laboratories in an all-stock deal valued at $115 million. The news comes on the heels of other major purchases by Edmonton-based Aurora, including cannabis companies MedReleaf and CanniMed as well as stakes in retail liquor stores, organic waste technology and softgel capsule production.
The MedReleaf deal effectively vaulted Aurora past Canopy Growth as the world’s largest cannabis company. But how big is too big? Mersch says that like a lot of companies in the cannabis space, current valuations are out of whack with the realities of the nascent industry.
“It’s true, they’ve been like a drunken sailor, acquiring a lot of businesses,” Mersch told BNN Bloomberg. “It’s not so much the fact that they’re buying these companies and managing these companies. At the end of the day, you’re really managing a growth profile — I’m talking about the plants and the processing and all those things.”
“You should be concerned about the amount of dilution that’s going on in the company. I don’t think it’s over. And with dilution there’s also a fair amount of risk in the sense that they’ll do underwritings and further dilute it as we go forward,” he says.
With Canada’s Parliament now putting the final touches on Bill C-45, the Cannabis Act, estimates are that the rec retail market could be open by the end of summer or possibly September, if all goes well. But restrictions on promotion and marketing along with the fact that edible products won’t be legal for a further year hence means that the incoming industry will have little of the hallmarks of a value-added business with healthy profit margins — instead, it’ll more closely resemble a commodity market.
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“The question about cannabis is much different in Canada as opposed to the US, in the sense that you’re not able to do the edibles. That’s coming down the road,” says Mersch. “So really, you’re just a grower. A grower trying to develop a brand and yet you can’t even advertise. So, it’s going to be a different type of approach for the first number of years.”
“We’re actually short Aurora. We’re long a number of other cannabis companies like [The Hydropothecary Corp] and others, so we’re trying to get a balanced approach,” he says.
Mersch contends that at this point the valuations for many of Canada’s pot co’s are “very, very rich.”
“They remind me of the diamond business years ago or some of the heady times during the biotech field,” says Mersch. “There’s going to be a handful [of companies] that survive and do very, very well but I think the bulk of the group is at risk.”