Is that why Aurora Cannabis and Coca-Cola have never concluded a deal? – The crazy fool

The marijuana industry is full of enthusiasm, as evidenced by the recent performance of marijuana stocks. Until Wednesday, March 20th, the Horizons Marijuana Life Sciences ETF, the very first publicly traded fund, had gained 67% since the beginning of the year, which had adverse effects on all other industries and the vast S & P 500 out of the water.

It is also a dynamic industry that is undergoing many changes. We have begun to see some consolidation across the industry in order to reduce long-term costs and improve market share. This consolidation is particularly prevalent among Canadian potato producers and vertically integrated dispensary operators in the United States.

Aurora Cannabis paves the way for marijuana production

In Canada, no marijuana stock has taken to heart the need to gain market share in the early stages of the legalization of recreation. Aurora Cannabis (NYSE: ACB). Aurora, which is expected to set the tone for all marijuana growers with a peak annual production of 700,000 kg, has made four fairly significant acquisitions over the past year. In chronological order, he bought:

• CanniMed Therapeutics, Saskatchewan, for approximately $ 852 million
• MedReleaf based in Ontario for about $ 2 billion
• ICC Laboratories of South America for around 200 million dollars
• Whistler Medical Medical Marijuana in British Columbia: $ 130 Million North

The additional production from these purchases, as well as organic projects such as Aurora Sky and Aurora Sun and partnerships (for example, Aurora Nordic), have enabled Aurora to climb to the top of the production chain. marijuana. As a leading producer, Aurora should have no trouble signing lucrative long-term supply contracts in Canada and would seemingly be a logical candidate for partnerships.

The mammoth partner who was almost

And yet, something is missing from a strategy well received by investors – namely, Aurora Cannabis has not yet been designated as a brand partner in the food, beverage, tobacco or food industry. pharmaceutical. Main rival Cover growth closed $ 4 billion investment in Modelo shares and Corona brewer Constellation Brands in November – Constellation's third separate investment in Canopy – while Cronos Group finalized a $ 1.8 billion equity investment by the tobacco giant Altria this month.

To be clear, Aurora Cannabis has had its opportunities. In September, BNN Bloomberg reported that Coca Cola (NYSE: KO) and Aurora participated in management level discussions on a possible partnership or equity investment. Sales of Coca-Cola sodas have been declining in North America for some time, and a partnership with Aurora Cannabis could be a success if Health Canada approves alternative consumption options, such as cannabis-infused soft drinks, cannabis # 39; fall. With Aurora's knowledge of cannabis and its superior production, combined with Coca-Cola's financial resources and marketing expertise, a combination seems to make a lot of sense.

But as we all know, Coca-Cola and Aurora could not agree amicably. The drinks giant has instead watched the cannabis industry grow in complete safety.

Is this the reason the nascent partnership of Coke and Aurora failed?

How, exactly, has Aurora Cannabis possibly left the best known beverage manufacturer to get away from even casual discussions without going through an agreement? Although no one except the leaders of both companies knows this answer with certainty, I can afford an educated guess. I suspect Coca-Cola is afraid to invest in Aurora Cannabis due to the company's acquisition growth strategy.

Before the legalization of weeds for adults in Canada last October, most marijuana stocks had their hands tied when raising capital. With non – dilutive bank offers, marijuana stocks like Aurora Cannabis have frequently turned to buying offers to make money. In the case of Aurora, it would use its common shares as collateral necessary for the realization of acquisitions. For example, its $ 2 billion takeover of MedReleaf resulted in the issuance of more than 370 million shares, while the CanniMed acquisition saw the issuance of nearly 73 million shares. millions of shares.

Why is it important? The answer is simple: If Coca-Cola were to invest in Aurora Cannabis, which Aurora's management may have been asking for, its equity interest in the company would be continually diluted by Aurora's growth strategy at all costs. We have already found that the Company's shares have significantly underperformed relative to the growth of its market capitalization resulting from stock-based dilution. It is quite possible that it was the pivot that also led to the return of Coca-Cola in September.

All hope is not lost

Of course, there is still a lot of hope for the negotiations. Last week, Aurora Cannabis announced that it has hired billionaire Nelson Peltz, founder of Trian Fund Management, as its strategic advisor. This role will encourage Peltz to seek partnership opportunities for the company and to advise Aurora on its international expansion.

What made this announcement so special is Peltz's expertise in unlocking shareholder value as an activist investor under Trian's leadership in the food and beverage business. Aurora has not hidden its intention to expand its product portfolio and enter the space of cannabidiol-infused drinks. Presumably, Peltz should be able to find suitable partners and help orchestrate a partnership and / or equity investment with a branded food or beverage company. That would mean names like Coca-Cola, PepsiCo, and Mondelez International are potentially on the table as partners.

Personally, I would be shocked if the calendar year ends and Aurora has not yet concluded a partnership with a well known company. But as long as Aurora continues to use its common shares as a means of inorganic growth, it will be much harder to obtain an equity investment similar to that of Canopy Growth and Cronos.