Is Aurora Cannabis’ Partnering Technique Brilliant or Boneheaded?

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Never anticipate Aurora Cannabis (NYSE: ACB) to get a enormous investment from a significant firm outdoors the cannabis business. There are not probably to be higher-dollar transactions like Canopy Development (NYSE: CGC) or Cronos Group (NASDAQ: CRON) had. There is a uncomplicated explanation: Aurora does not want that sort of a deal.

Aurora’s chief corporate officer stated in an interview with MarketWatch earlier this month that the firm is “taking a distinct strategy” to partnering outdoors of the cannabis business than some of its peers have. Confident, Aurora desires a main companion. But it does not want to give up an equity stake to make such a deal occur.

Is Aurora’s partnering tactic brilliant? Or could it basically be a boneheaded strategy?

Chalkboard drawing of six smaller white light bulbs and 1 bigger yellow light bulb with a query mark in the center of it

Image supply: Getty Photos.

Why it tends to make sense

Aurora’s executives did not come up with the notion of taking a distinct strategy to partnering, according to Battley. In March, Aurora brought billionaire investor Nelson Peltz on board as a strategic advisor. Peltz encouraged that the firm not begin down a path exactly where manage of Aurora could sooner or later be handed more than to a bigger firm.

This situation could — and numerous believe will — occur for each Canopy Development and Cronos Group. Major alcoholic-beverage maker Constellation Brands owns a 38% stake in Canopy and has warrants that could up its interest to above 50%. It really is a comparable story for tobacco giant Altria, which owns 45% of Cronos.

But Peltz urged Aurora’s management group to stay independent. And rather of teaming up with just 1 significant firm outdoors of the cannabis business, he advised Aurora to seek several partners across many industries that could be disrupted by cannabis. Aurora CEO Terry Booth and the rest of the company’s best executives purchased into Peltz’s strategy.

There are two key benefits to this strategy. Initially, Aurora shareholders could make even higher returns more than the extended run if the firm achieves tremendous good results as a standalone entity. Second, this strategy permits Aurora to companion with many main businesses outdoors of the cannabis business rather than just 1 — which just may improve its odds of succeeding.

Aurora is not the only main Canadian cannabis firm employing this partnering tactic. Tilray hasn’t offered up an equity stake to a companion so far. The firm has currently teamed up with partners in many industries: significant drugmaker Novartis, giant beer maker Anheuser-Busch InBev, and customer brands firm Genuine Brands Group. Tilray’s partnering strategy is arguably its largest competitive benefit ideal now.

A handful of important drawbacks

This partnering tactic that Aurora is adopting is not best, although. Although it could reward the company’s shareholders more than the extended term, you could make a quite superior case that the lack of a main equity companion is holding Aurora back at least somewhat for now.

Some may argue that Aurora’s stock functionality has been genuinely superior even with no a significant companion. And it has been.

But Aurora’s industry cap is only a small more than half the industry cap of Canopy Development. However Aurora has a higher production capacity than Canopy, has a stronger international presence, and is a close No. two behind Canopy in the Canadian adult-use recreational marijuana industry. The most plausible explanation as to why Canopy’s industry cap is so a great deal greater than Aurora’s is that Canopy has a significant companion and Aurora does not.

One more drawback to Aurora’s partnering strategy is that it will not have the enormous infusion of money that comes with an equity partnership deal. Canopy Development reported a money stockpile of far more than $four.9 billion Canadian (about US$three.7 billion) at the finish of 2018. Aurora, on the other hand, had only CA$88.two million (about US$66.eight million) in money and money equivalents at the finish of final year.

So though Canopy Development is flush with money to fund its expansion efforts, Aurora should raise added money by either taking on far more debt or issuing new shares. The firm has accomplished a lot far more of the latter, announcing in April that it had filed regulatory paperwork to raise up to US$750 million by issuing new securities. The most important difficulty with issuing new shares is that it dilutes the worth of current shares. 

There is also 1 other possible fly in the ointment with Aurora’s partnering tactic. It really is totally feasible that a significant companion outdoors of the cannabis business is adamant about getting an equity stake in its cannabis companion. Aurora could conceivably drop out on winning a main partnership deal if it is not versatile about handing more than ownership interest. Perhaps this will not turn out to be a difficulty, but it appears probably that Altria and Constellation Brands would not have teamed up with Cronos and Canopy if the two cannabis producers had not been prepared to give up equity stakes.

Wait and see

If the company’s partnership bargains are structured in the ideal way, Aurora could be in good shape. The difficulty for now, although, is that there are not any partners lining up at Aurora’s doorstep that we know about.

Nevertheless, it appears probably that Aurora will land 1 or far more significant partners in other industries. But we’ll have to wait and see if the company’s partnering tactic turns out to be brilliant or boneheaded — or perhaps someplace in among — more than the extended run.

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Keith Speights has no position in any of the stocks talked about. The Motley Fool recommends Anheuser-Busch InBev and Constellation Brands. The Motley Fool has a disclosure policy.

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