Curaleaf Raised Its Hostile Bid for Aurora to $5 a Share. Aurora Still Hasn't Said Yes.

Curaleaf raised its hostile bid for Aurora Cannabis to about US$5 a share on October 5, an 86% premium, by Curaleaf's math, to Aurora's 30-day average price before the bid was announced. Aurora's board told shareholders to take no action while it reviews the new offer.

It's the only hostile bid by a US cannabis company for a Canadian producer we found since Green Growth Brands went after Aphria in 2018, and it's turned into a fight over cash, voting power and Germany. The market isn't sure it closes: on October 9, Aurora traded at US$4.49, while the offer was worth about US$4.77 at Curaleaf's closing price.

About the numbers: offer terms come from Curaleaf's filings with the SEC and Canadian regulators. The offer's market value is calculated from Curaleaf's US closing price on Yahoo Finance. Aurora's financial results are in Canadian dollars (C$); share prices and offer values are in US dollars (US$).

The offer

Curaleaf announced the bid on August 11, after sending Aurora's chief executive a letter of intent in June and a follow-up with financial terms in July. It offered 0.3463 Curaleaf shares plus US$0.75 in cash for each Aurora share, about US$4.00, a 45% premium to Aurora's 30-day average price of US$2.75. Curaleaf formally launched the offer on August 18.

On October 5, Curaleaf raised it to 0.4013 Curaleaf shares plus US$1.00 in cash, worth US$5.00 at Curaleaf's October 2 price. It raised the ceiling on the offer to US$6 a share and, in a filing the next day, pushed the deadline from December 1 to December 4. Curaleaf would issue up to 26.8 million new shares. The cash portion comes from cash on hand, and there's no financing condition.

Because most of the offer is paid in Curaleaf stock, its value moves with Curaleaf's share price. Curaleaf closed at US$9.39 on October 9, which made the offer worth about US$4.77. Aurora closed at US$4.49, about 6% below that. A gap that size suggests traders see a real chance the deal doesn't close on these terms. It also reflects the two months until the offer expires and the risk of being paid in Curaleaf shares.

Why Curaleaf wants Aurora

Most of Aurora's sales now come from medical cannabis outside Canada. In its quarter ended June 30, Aurora's international medical sales rose 17% to C$43.3 million, driven mainly by Germany, about 64% of its C$67.6 million in revenue, per its results. Its Canadian medical sales fell 25% after a federal reimbursement cut. It has C$149.1 million in cash and short-term investments and no debt. On October 8 it said it had finished expanding its EU-GMP production site in Leuna, Germany.

Curaleaf already runs EU-GMP certified sites in Portugal, Spain and Canada, and its international sales rose 26% to US$51.4 million in the second quarter. Its pitch is a company in 17 countries with more than US$1.5 billion in trailing-12-month revenue, nearly US$350 million in adjusted EBITDA and at least US$40 million a year in cost savings. Aurora would add more than 50 tons a year of EU-GMP capacity. For Curaleaf, whose US adult-use sales remain federally illegal, Europe's medical market is a growth path that doesn't depend on Washington.

Why Aurora says no

Aurora's board unanimously recommended rejecting the original offer on September 2. It argued the bid uses Aurora's own cash to shore up Curaleaf's balance sheet. Curaleaf's second-quarter numbers show US$611.5 million in notes payable against US$107.0 million in cash, per its results, and Aurora says the total tops a billion dollars once financial obligations and leases are included.

Aurora also objected to the shares its holders would get. Under the original terms, they would have owned about 7.7% of the combined company but only about 3.2% of the votes, because of Curaleaf's multiple-voting shares. And Curaleaf's stock trades on the Toronto Stock Exchange and over the counter in the US, not on a US national exchange.

Aurora hasn't responded formally to the revised offer. On October 6 it told shareholders to take no action while a special committee reviews it. Its new directors' circular is due within 15 days.

The fight so far

Both sides have gone to the Alberta Securities Commission. On September 14, Curaleaf asked the commission to halt Aurora's at-the-market share sales. It said Aurora had sold about 2.81 million shares since June at an average of US$3.04, adding more than US$11 million to the cost of the offer. Aurora said the program predated the bid and had been inactive for weeks. On September 23, Aurora filed its own application, arguing Curaleaf's circular left out pro forma financial statements and a French-language notice for Quebec, and didn't stay open the required 105 days. Curaleaf added the pro forma statements and extended the deadline when it raised the bid. We found no ruling from the commission as of October 10.

Aurora also has a shareholder rights plan that triggers at 20% ownership. Curaleaf structured its offer to qualify as a "permitted bid" under that plan. Aurora argued in September that it didn't, because the bid hadn't been kept open long enough. Curaleaf has since extended the deadline.

Then a possible rival appeared. Around October 9, Cannabis Equipment News relayed a report from the trade outlet Cultivated that Organigram had been in merger talks with Aurora for "the past few weeks." Neither company has confirmed it; both declined to comment. Curaleaf told the outlet: "We are outraged, and Aurora shareholders should be too." It also said Aurora had refused it access for due diligence while letting a smaller rival in.

Has this happened before?

Once that we could find, and it failed. In December 2018, Ohio-based Green Growth Brands made a hostile all-stock bid for Aphria, then one of Canada's largest producers. Aphria rejected it, and the bid expired in April 2019 without enough shares tendered. Aurora knows the playbook from the other side: in late 2017 it launched a hostile bid for CanniMed that turned into a friendly deal of about C$1.1 billion two months later, per BNN.

What happens next

• About October 21: Aurora's new directors' circular on the revised offer is due.
• December 4: the offer expires unless it's extended. Shareholders who tender can withdraw their shares any time before Curaleaf takes them up.

Curaleaf can't buy any shares unless more than 50% of Aurora shares not held by Curaleaf or anyone acting jointly with it are tendered, a condition it can't waive. It also needs approval under Canada's Competition Act and from German foreign-investment and merger regulators.