The euphoria that followed the announcement Wednesday that Aurora Cannabis Inc. (NYSE: ACB) is acquiring Reliva LLC was subsiding Friday.
The Canadian marijuana stock shot up more than 30% on Thursday, closing at $17.40, after news of the deal with U.S. hemp retailer Reliva was released late Wednesday. But Aurora’s stock gains receded Friday, down just over 6% at midday.
Aurora will pay $40 million in stock, plus $45 million in stock or cash if financial targets are achieved. The acquisition allows Aurora to enter the United States and access its thriving CBD market. The purchase is expected to close in June.
The privately held Reliva is reportedly a profitable business, selling balms, creams, gummies, tinctures and beverages with hemp-derived CBD. Its products are available in more than 20,000 retail locations across the United States and online.
Looking for Profitable Growth
“Together, Aurora and Reliva will partner to create an international cannabinoid leader that we believe can deliver robust revenue and profitable growth,” said Michael Singer, Aurora’s executive chairman and interim chief executive. “We have taken the time necessary to carefully assess the company’s entry into the U.S. market and we firmly believe that the combination with Reliva will create significant long-term value as Reliva provides us options to grow in hemp-derived CBD internationally.”
Reliva’s chief executive, Miguel Martin, will remain with the combined company, becoming president of Aurora USA. “We were fortunate enough to be able to choose our long-term partner and believe this partnership provides a significant opportunity to accelerate sales growth for Reliva in the United States and internationally,” said Martin, who has 25 years of experience in consumer packaged goods.
Recreational marijuana became legal across Canada in October 2018. In the United States, it is legal in Alaska, California, Colorado, Illinois, Maine, Massachusetts, Michigan, Nevada, Oregon, Vermont and Washington state. Only three states — Idaho, Nebraska and South Dakota — prohibit medical marijuana.
Generally Positive Reaction From Analysts
Analysts seemed to be generally positive about the Aurora-Reliva deal.
CIBC Capital Markets noted that Reliva’s CBD brand gives Aurora access to a large base of customers but noted that the CBD market in the United States is highly competitive. CIBC also said that Reliva is profitable and carries no debt.
BMO Capital Markets said that Reliva generated C$14 million in revenue over the past year. It added that having Martin on the executive team would be a plus.
Cowen said Aurora may be able to capitalize on a more accepting view of CBD products and THC at the Food and Drug Administration.
But Jefferies downgraded Aurora to underperform from hold, although its Canadian price target was raised to C$14 from C$12.
Raymond James analysts had been tepid on Alberta-based Aurora since its earnings report was released.
The analysts’ consensus on the pot stock is Hold. The median target price is $9.92, with a high estimate for the stock price of $19.46 and a low of $4.47.
Strong Earnings Report
Earlier this month, Aurora reported a net loss per share of C$1.37 on revenues of C$76.4 million for the fiscal third quarter 2020. Last year, the company posted a loss of C$1.89 per share on revenue of C$66.6 million. Shares surged on that news, too.
Analysts had forecast a net loss per share of C$0.04 and revenues of C$46.9 million. At today’s conversion rate, one Canadian dollar is equal to about $0.71 American.
The company’s net loss totaled C$137.4 million and adjusted EBITDA (earnings before interest, taxes, depreciation, amortization) came in at a loss of C$50.9 million. Adjustments included a charge of C$10.9 million for share-based compensation and a gain of C$15.4 million in the fair value of inventory. Prior to a reverse stock split earlier this month, Aurora had 1.3 billion shares outstanding, yielding a per-share adjusted loss of about C$0.04.
Aurora’s adjusted gross margin on cannabis was 54% in the quarter, and the company is targeting an annual margin greater than 50%. Selling, general and administrative expenses dropped by about 25% to $C75.1 million. The company said it was on track to meet a target of C$40 million to C$45 million by the end of the fourth fiscal quarter.
Earlier this year, Aurora cut 500 jobs and unveiled a sweeping financial revitalization plan. It included $750 million in write-downs and asset impairment charges, and a $100 million reduction in capex spending. Co-founder and chief executive Terry Booth stepped down in February.
Aurora’s acquisition of Reliva is the second major CBD deal in the last two months. In March, Charlotte’s Web said it had agreed to pay $69 million for Abacus Health Products, which makes the CBDMedic brand promoted by NFL tight end Rob Gronkowski.