One way for marijuana companies to strengthen their financial positions and growth prospects is through consolidation. Aurora Cannabis (NASDAQ:ACB) has been rumored to be involved in some talks over major deals in the past few years. In 2018, BNN Bloomberg reported that the Canadian pot giant was in talks to develop cannabis beverages with Coca-Cola. Obviously, what would’ve been a blockbuster deal never came to fruition.
Months later, seemingly intent on finding a partner from another industry, Aurora hired billionaire investor Nelson Peltz as a strategic advisor to “explore potential partnerships.” Ultimately, he wasn’t able to find a deal for Aurora before resigning in September 2020. Most recently, there were also rumors of merger talks between Aphria and Aurora, only for that deal to fall through. Aphria instead decided to join forces with Tilray, forming the biggest cannabis company in the world in terms of revenue.
With no success in finding a partner or company to merge with, let’s take a look at why companies may not be willing to join forces with Aurora and whether there is hope of a deal coming together this year.
Is Aurora just too much of a headache?
Aurora prides itself on having a presence in 25 countries across the world, but that could be more of an impediment than an advantage. With so many different operations to manage, a prospective partner may see it as a big undertaking to acquire or merge with Aurora. And having vast operations isn’t the least of Aurora’s problems.
In its most recent fiscal year, for the period ending June 30, Aurora incurred a net loss of 3.3 billion Canadian dollars. Much of that was a result of impairment losses totaling CA$2.8 billion. On an adjusted EBITDA basis, however, the company says it is on track to hit breakeven by the second quarter of fiscal 2021 — results that will likely come out as early as next month. In its first-quarter results released Nov. 9, Aurora reported an adjusted EBITDA loss of CA$57.9 million.
While burning through cash from its operations in each of the past four quarters, share issues have been common as the company tries to raise money. Share dilution drives down a company’s share price. Aurora’s stock has fallen 60% in the past year, much worse than the Horizons Marijuana Life Sciences ETF, which has declined just 4% over the same period.
For a prospective company looking to partner, merge with, or acquire the business, that’s a big concern, because it means Aurora needs significant financial support — and it’s not as if the business has been showing much growth of late to make it a worthwhile investment. In the first quarter, Aurora’s net revenue of CA$67.8 million was down 1% from the previous quarter. And that’s even further from the CA$73.5 million that it reported in the third quarter.
Between having locations all over the world, cash flow and profit problems, and a lack of growth, there’s no shortage of issues for a potential partner or acquiring company to deal with. Aurora may first need to address these issues to make its business more attractive before it’s able to land a deal.
Does it come down to management?
It’s understandable if companies from other industries are hesitant to invest in marijuana, given that the industry remains illegal in the U.S. and a company like Aurora isn’t exactly a safe bet.
But as problematic as Aurora’s business may be, it’s not exactly a secret among other cannabis companies. Despite its problems, Aphria was still interested in merging with the company. The companies were rumored to be fine-tuning the details of a potential merger, including the composition of the board and executive compensation when Aphria decided to team up with Tilray.
With Aurora focused on costs and trimming its expenses wherever it can, it could be that the financials are playing a more important role for management now than in the past, and so items like compensation could be a dealbreaker. Just last month, Aurora announced another round of job cuts and layoffs of 214 workers. It also said it would be pausing operations at its Aurora Sun facility and slashing production by 75% at Aurora Sky.
There’s also been a lot of change at the CEO position in just the past year, which may have impacted the company’s vision and long-term strategy. In February 2020, Terry Booth resigned as CEO. Executive Chairman Michael Singer took over and end up hanging on for a while before relinquishing the post to Miguel Martin on Sept. 8, 2020.
With so much going on at Aurora and management under pressure to improve the bottom line, the timing may simply not have been right to get a deal done — especially if it would add costs, even in the short term.
Will Aurora strike a deal this year?
If Martin can provide stability at the CEO position and Aurora can hit its positive adjusted EBITDA target, the company will become much more attractive to a potential partner or investor this year. Aurora may even decide to take on an acquisition of its own. But given the company’s financial struggles and the aggressive cuts that it has been making of late, it would be surprising to see Aurora make a large purchase in 2021. The more likely scenario is that it merges with another cannabis company — assuming it can find a suitable partner.
However, this is still a risky pot stock to invest in. Investors shouldn’t assume that a big deal is around the corner, and even if one does end up coming together, it doesn’t mean that Aurora’s problems will suddenly disappear.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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