Aurora Marijuana ( OTC: ACB) announced a small offer to get a CBD company in the U.S. for $40 million in shares. We believe the deal is too small to make a meaningful distinction to the company. The timing of the offer is also doubtful. The U.S. CBD industry is dealing with an oversupply due to low barriers of entry and ample supply of cheap hemp basic materials. Getting in a crowded and difficult market at this time raised more questions relating to Aurora’s strategy and ability to money a brand-new market while it tries to pull off a turnaround in its core operation in Canada.
( All quantities in USD)
Going Into U.S. CBD Market
After the marketplace closed on Wednesday, Aurora revealed that it will acquire Reliva which is a U.S. CBD business. The deal is priced at $40 million in shares at closing and an earn-out of approximately $45 million over 2 years. Aurora shares soared over 30%on the news which appears excessive given the limited impact this offer will have on the company as discussed below.
The U.S. CBD market has actually existed for several years and has actually been disrupted because 2018 after the 2018 Farm Expense passed to legislate commercial hemp cultivation. A lot of investors expect the CBD market to experience significant development for the years to come. There is a catch that has actually affected market incumbents. Given that the 2018 Farm Expense was passed, a great deal of suppliers went into the CBD market helped by the low barriers to entry and booming customer demand for CBD-infused items. Cheap hemp crops are likewise easily offered from farmers around the nation. Ever since, we have actually seen CBD companies dealing with deteriorating market share and degrading financial efficiency regardless of the overall market development.
( Source: Bloomberg)
The leading public company in CBD is Charlotte’s Web ( OTCQX: CWBHF) and its recent underperformance functions as an excellent proxy for the general market obstacles. Because Q4 2018, sales have not grown at CWEB and gross profit stayed flat all while the entire CBD market experienced substantial development. After the legalization, nationwide F/D/M partners entered the arena and CWEB took pleasure in substantial growth from these channel partners. However, the increasing competition suffocated its traditional retail outlets including lots of health and health stores and independent merchants. Regardless of investing heavily in facilities and sales and marketing, CWEB has dealt with major headwinds in attempting to grow its company in the crowded CBD market.
( CWEB financials
Return of Irrational Vitality?
Aurora shares have actually bounced off current lows after it reported fiscal 2020 Q3 results that revealed stabilization in its monetary efficiency. Aurora now has C$ 2 billion of market cap and trades at 8.5 x EV/Sales (Q3 cannabis-only sales annualized) which is in-line with other top Canadian LPs. We think the shares will continue to be volatile provided its popularity amongst retail investors and speculators. After the current 12- to-1 share consolidation and a big rally in the last 2 weeks, the stock stays 47%down in 2020.
( Source: TSX)
As gone over above, we believe the nature of this acquisition suggests that there will be a very minimal impact on Aurora’s financial performance given the size of the deal and bleak growth potential customers. While Aurora didn’t reveal the monetary metrics, we believe the deal is likely really small considered that industry leader Charlotte’s Web presently trades at ~ 5x income. Reliva is likely to fetch a much lower multiple which means that its profits is likely around $8 million or greater based upon the $40 million base purchase rate. With minimal growth chances within the CBD market, we see this deal doing little to help Aurora’s growth profile. There will also be no synergies provided Aurora essentially has no existence in the U.S.
The acquisition of Reliva is an extremely little deal thus its influence on Aurora will be limited. The all-stock deal likewise triggers additional dilution to existing investors who have actually been diluted through numerous big acquisitions over the past three years. The choice to enter the U.S. CBD market is also arguable as the market is presently reeling from oversupply and low barriers to entry. In general, this is a transaction that is not going to considerably change the growth profile or financial performance of Aurora provided the current market conditions which indicates that any extreme share price movement is likely an overreaction and could be reversed in the near-term. We remain cautious on the business provided its tough task of pulling off a turn-around.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I composed this article myself, and it expresses my own viewpoints. I am not receiving settlement for it (besides from Looking For Alpha). I have no service relationship with any business whose stock is mentioned in this article.