The courtship show between Aurora Cannabis Inc. and Reliva began, as many novels do, with a gathering of major traffickers and bankers from the industry.
It was not entirely love at first sight.
Long before the first meeting at a 2019 conference led by an investment bank, Aurora
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was looking for a way to enter the US market. United States for a while, saying so publicly on profit calls and in interviews with MarketWatch. But it took Aurora months to seriously assess Reliva as an acquisition target, the CEOs of the two companies told MarketWatch in a telephone interview this week.
Months after this first meeting, Aurora’s management team flew to Boston and met Reliva, a company specializing in cannabidiol or CBD. For 48 hours, Aurora and Reliva heads visited wholesale and physical stores and discussed the business, and Aurora CEO Michael Singer told MarketWatch that they had learned enough during of those two days to start seriously evaluating Reliva. .
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“We learned a lot about Miguel [Martin] and a lot about the history of Reliva, and she learned about the history of Aurora’s business, “said Singer in a telephone interview. When we think of [Aurora’s] restart of the plan, we think it is a responsible and strategic acquisition. It’s not just the United States “
Aurora’s lawyers have worked hard to examine Reliva, verifying its operations, staff and intellectual property, although Singer says there was not much intellectual property to consider. Reliva CEO Miguel Martin and other senior officials visited Aurora’s board of directors in Toronto at a time when this was still possible, and there were several “long and thoughtful conversations” before the two sides feel comfortable enough to get married, said Singer.
Up close, Reliva had already tried to attract capital: it was seeking cash at a pre-money valuation of $ 40 million from venture capitalists, among others, according to two people familiar with the matter. It would be about three times Reliva’s annual revenue of $ 13 million to $ 14 million, Aurora confirmed on Friday.
Instead, Reliva accepted $ 40 million in Aurora shares to sell the company directly, with an additional $ 45 million in potential profits, as the companies announced on Wednesday. When Aurora announced the deal, its majority retail investor base reacted positively, raising Aurora’s share price after stocks had already released two days by 50% profit in response to its report on the results.
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If successful, the acquisition will help Aurora establish a bridgehead in the United States. United States Thanks to an active CBD and it will contribute to growth its association with Ultimate Fighting Championship, which is owned by several tightly controlled venture capital companies. But analysts certainly don’t describe the deal as a homerun. Jefferies reduced its target price on Aurora shares to C $ 12 ($ 9.99) instead of C $ 14, to take into account Reliva’s estimates.
In a note to customers on Friday, Jefferies analyst Owen Bennett wrote that the timing of the transaction and this particular acquisition were bizarre and that the company’s focus on adjusted profits warrant “careful consideration”. “. In the press release announcing the deal, Aurora presented Reliva as “profitable,” but Singer explained to MarketWatch what it meant on an adjusted basis, not to use standard accounting.
“There is still no permanent CEO to lead this CBD dynamic, the CBD space is currently experiencing headwinds, there is additional dilution in a questionable multiple that has been a critic of the past,” wrote Bennett. . “Furthermore, it potentially obscures the true underlying [earnings before interest taxes deductions amortization] delivery in [the first quarter] which could now be supported by this agreement. “
Reliva operates in a crowded market, there are probably hundreds of companies in the United States. United States They produce cannabidiol, or CBD products, which are difficult to distinguish. While Aurora cited a report predicting that the “CBD opportunity” will be $ 24 billion, and the Drug Administration has not released clear guidelines on the substance. The U.S. Congress United States legalized cannabis with small amounts of THC, called hemp, in late 2018, but the FDA has made it clear that it is illegal to make food, drink, and cosmetics with CBD because it determines how to regulate the compound.
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Martin says that while the FDA’s position is important, it also focuses on legalizing the state: 41 have passed laws on CBD, which is a non-toxic compound found in the marijuana plant.
Reliva manufactures CBD products, but its real strength lies in its distribution network. Martin says there are currently around 50,000 stores selling CBD in the United States and that his company sells products in 20,000 of them. And when Martin talks about stores, he is referring to convenience stores like Circle K, which belongs to Alimentation Couche-Tard Inc.
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, a multinational convenience store operator based in Laval, Quebec.
Martin says the company’s main argument for its products is that they are cheap: they are all under $ 20, while rival Lord Jones, which was acquired by Cronos Group Inc.
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sells 30 gel capsules for $ 95.
Pricing may be essential in the context of the COVID-19 pandemic, and Martin noted that disposable income has declined. However, it could also hurt overall activity, as Martin admitted that the pandemic had an impact on sales with a significant drop in pedestrian traffic in convenience stores.
Martin said the products have remained on sale, but the impact is unclear for the peak season, which means May through September for the type of retailers that Reliva relies on. The summer months tend to be more lucrative simply because the weather is better.
“We have a seasonal business,” said Martin in a telephone interview.
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