Last week, rumors surfaced about Aurora Cannabis Inc. (ACB.TO) (ACB) and its plan to merge with a leading Canadian cannabis producer. The market initially responded favorably to the rumors and we were not surprised by this. If the transaction is completed, the combined company would rival Canopy Growth Corporation (WEED.TO) (CGC) and would have a more than 30% market share in Canada.
Although we are excited about the impact that a mega-merger would have on the cannabis sector, we believe that Aurora Cannabis should be targeting smaller scale operators that are levered to strategic international markets and have strategic relationships that would enhance the growth prospects of the combined company.
We believe that HEXO Corporation (HEXO.TO) (HEXO) would represent a strategic acquisition target for Aurora Cannabiss such that the combined company would have attractive leverage to the US, Canadian, and international markets. From a capitalization standpoint, we believe that these two companies are well suited for each other and will monitor how the process plays out for Aurora Cannabis.
There are a number of reasons that explain our positive view on the combination of HEXO and Aurora Cannabis and we want to briefly highlight them:
- HEXO has formed a strategic partnership with Molson Coors to develop and sell CBD beverages in the US and Aurora recently acquired a US CBD company.
- HEXO formed a partnership with Breath of Life (BOL), a leading Israeli cannabis company, and the leverage to Israel would benefit Aurora Cannabis due to the assets that it owns in Europe.
- The combined company would be in a much better positioned from a capital standpoint and this would make it easier for the companies to execute on previously announced initiatives.
Another reason we believe that Aurora Cannabis and HEXO would make a good fit is related to the issues that the businesses are facing. Both companies trade on the New York Stock Exchange (NYSE) and are subject to certain requirements to remain listed on the exchange. One of the requirements is related to the share price as company must trade above the $1 level to remain listed on it.
Aurora Cannabis was forced to conduct a reverse split to raise the stock price and to remain listed on the exchange. By completing the split, Aurora Cannabis drastically decreased the number of shares that are outstanding, and we believe that this will help clean up the capital structure of the business. Like Aurora Cannabis, HEXO has been trading below the $1 level and we would not be surprised if it was forced to conduct a reverse split to remain listed on the exchange.
We find the similarities between Aurora Cannabis and HEXO to be significant and would not be surprised if the companies announced some type of merger agreement. Prior to a merger, we would expect to see HEXO conduct a reverse split and for this to make the transaction more meaningful over the long-term.
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