Aurora Cannabis shareholders shudder as company sells itself short

Bethan Rose Jenkins, Cannabis News Writer/Editorial

On May 14, 2018, a press release announcing Aurora Cannabis’ intention to acquire all of the issued and outstanding common shares of MedReleaf was published. This all-share transaction was valued at approximately CAD$3.2 billion – equivalent to USD$2.3 billion – on a fully-diluted basis. Unfortunately, Aurora has fallen into a pit of financial woes, after the company recently revealed that it may be writing down $1 billion for its MedReleaf acquisition.

Furthermore, the Edmonton-headquartered cannabis company just agreed to a measly offer for the purchase of its one-million-square-foot greenhouse and 164-acre property; of which was originally snapped up by Ontario cannabis producer MedReleaf at the beginning of 2018 for CAD$26 million — equivalent to USD$18.6 million.

The accepted offer for Aurora’s large cannabis cultivation greenhouse – which is based in Exeter, Ontario – will earn the struggling company just half of the CAD$17 million (USD$12.1 million) listing price. Adding salt to Aurora’s wounds, the sale price was just one-third of the original purchase price.

Aurora Cannabis was once a thriving producer in Canada’s legal market 

Once upon a time, Aurora was one of the most sought-after weed producers. At their peak capacity, the Canadian cannabis company’s annual output – from 15 production facilities – was somewhere in the range of 660,000 kilos. This colossal level of production was hardly surprising, since the company boasted access to over two dozen markets outside of the “Great White North” borders.  

Perhaps one of the most significant hurdles that companies like Aurora have been forced to overcome is the fact that high profit margin cannabis derivatives were long-delayed — the second phase of legalization in Canada involved the retail sale of cannabis edibles, although vape devices were postponed in January by Health Canada. Conversely, the Department has also been slow in its approval of both cannabis sales and grow licenses.

It was in November 2019 that Aurora committed to purchase MedReleaf in the multi-billion dollar deal, which the company described as “the world’s largest cannabis industry transaction.” The Canadian cannabis company’s motive was “to rationalize capital expenditures,” according to a regulatory filing. Anticipated to close in May, the filing confirmed that Aurora accepted for a net proceeds of CAD$8.6 million, which works out at around USD$6.2 million.

With over CAD$358 million (USD$257 million) in assets and close to CAD$49 million (USD$35 million) in liabilities featured on MedReleaf’s annual filing before the deal’s closing, it’s possible that Aurora might have passed the point of no return. Since Aurora wants to sell the Exeter greenhouse for just USD$12.1 million, the final result is likely to be a CAD$2.62 billion (USD$1.9 billion) price tag. For that amount, Aurora has a mere 35,000 kilos in combined annual output from MedReleaf’s brands — Bradford and Markham.

Overspending on cultivation space in Canada’s cannabis market proving problematic 

Aside from the fact that a virus pandemic has broken out across much of the world – coronavirus (COVID-19) has reportedly killed 320,392 people as of May 19, 2020 – and caused economic destruction in its wake, Aurora’s MedReleaf writedown can’t be solely attributed to the stumbling economy. A number of other cannabis producers are struggling to make ends meet and, consequently, are selling greenhouses just like Aurora has agreed to do. 

Examples of some producers that have done this include Canopy Growth, which announced in March that it would be closing three million square feet of greenhouses, as well as The Green Organic Dutchman. In October of last year, GOD attempted to part ways with its partially-completed new cannabis greenhouse for CAD$94.2 million (USD$68 million) in a leaseback deal; nobody wanted in. 

An abundance of licensed and unlicensed cannabis greenhouse owners spread across Canada – where the plant was officially legalized in its entirety on October 17, 2018 with the enactment of the Cannabis Act (C-45) of – got over-excited at the industry’s launch. 

The outcome? Excessive and unnecessary expenditure on cultivation spaces. Acquisitions peaked from 2017-2018; many of those producers were some of Canada’s biggest and since greenhouses can set back owners more than CAD$200 million (USD$144 million) to construct, redeeming the costs could be tricky. 

Let’s not forget about the fact that producers are favoring outdoor growing over indoor production, too. As a cost-cutting alternative, it’s clear that the weak Exeter sale by Aurora indicates prospective troubles in recovering from the company’s increasing financial depletion.