Aurora Cannabis (TSX:ACB) is a serial acquirer, says advisor Thomas George, who says buying up businesses with company stock comes with a big problem: share dilution.
The deals keep coming for Edmonton-based Aurora Cannabis, which just announced an agreement to buy cannabis research and product testing company Anandia Laboratories in an all-stock purchase valued at $115-million.
Aurora CEO Terry Booth says Anandia has some of the brightest minds in the cannabis industry.
“This is a transformative acquisition that expands our science capabilities in the upstream segment of the seed-to-sale cannabis value chain, significantly boosting plant-based innovations in cultivation, enabling accelerated product development, and, ultimately, enhancing our margin profile going forward,” says Booth in a press release.
Aurora’s list of recent acquisitions include an interest in retail liquor stores, in organic waste technology and softgel capsule production, not to mention the major licensed producer acquisitions of CanniMed Therapeutics and MedReleaf, both transpiring over the last half-year.
George says that paying for acquisitions with shares can raise some red flags and says that the MedReleaf deal is really a head-scratcher.
“[Aurora Cannabis] are serial acquirers that dilute existing shareholders, that’s the problem,” said George, president of Grizzle, to BNN Bloomberg. “They’ve done that with the MedReleaf acquisition.”
“The real question is, if this is such a great opportunity for MedReleaf — they literally IPO’d just over a year ago — why wouldn’t they just wait for the puck to drop?” says George. “Clearly, there are large, strategic shareholders there who’ve sold to Aurora, and whenever the lockups are done, that could really weigh on the shares.”
Beyond the dilution issue, Aurora management now faces the task of effectively integrating its new buys, all the while continuing to expand its marijuana cultivation business. With legalization on the horizon, Canada’s licensed producers are in a race to establish themselves as provincial governments and private retailers firm up their supply agreements.
Aurora’s flagship cultivation facility, Aurora Sky, is set to bring in its first harvest this month, with the company saying that full capacity of 100,000 kg of dried cannabis will be reached by early 2019.
George says that as far as the overall space goes, cannabis has “all the hallmarks of a bubble,” while for those investors still wanting to jump in, he advises staying away from the big players.
“In this phase, absolutely, you want to be the acquired company as opposed to the acquiree,” he says. “I would say find some interesting mid- to small cap stocks that trade at a relatively low valuation, park there and wait to get bought by that paper, and then you can trade out.”