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Marijuana stocks began to climb in 2019 and cannabis investors believe that the largest companies in the booming sector have enormous growth potential. Aurora Cannabis (NYSE: ACB) is one of the best-known companies in the industry, with unparalleled efforts to develop unprecedented growth capacity.
Yet unlike rivals like Cover growth and Cronos GroupAurora has yet to enter into a major partnership with an established and established consumer goods company. Aurora announced that billionaire hedge fund manager Nelson Peltz of Trian Fund Management would become the company's strategic advisor. However, even if shareholders immediately celebrated the news by pushing Aurora shares up by more than 10% in pre-market transactions, the announcement of Peltz will have a cost – and it is unclear whether this will benefit investors. long-term shareholders.
Source of the picture: Aurora Cannabis.
Peltz's reputation as a militant investor
The story of Nelson Peltz as an activist investor explains why investors in Aurora are excited about this decision. The billionaire has not hesitated to strive to stand out, especially by recently joining the Board of Directors of Procter & Gamble (NYSE: PG) in order to shake the giant of slow-growing consumer goods. Its influence has also had an impact on companies ranging from Mondelēz and PepsiCo in the snack and beverage area of the chemical company DuPont, which is now part of DowDuPont.
Peltz has extensive experience in the food industry, which has direct consequences for Aurora. Many cannabis producers are very interested in derivative products such as edible products and cannabis-based beverages. The familiarity of Peltz with the work needed to put in place the internal resources and the logistics necessary to succeed in this area should contribute to the expansion of Aurora.
What Aurora wants from Peltz
In his press release announcing the move, Aurora explained that he expected Peltz to "work collaboratively and strategically to explore potential partnerships that would be the optimal strategic solution for successful entry into each segment. proposed by Aurora ". The cannabis company also said Peltz would help Aurora in its global expansion strategy.
Aurora CEO Terry Booth has expanded his company's expectations. "Nelson is a recognized visionary in the business world," said Booth, "with a solid history of constructive engagement aimed at generating profitable and accelerated growth as well as value for shareholders in many markets. verticals of the sector that interest us a lot. " Booth also enjoys Peltz's long-term vision and believes that her advice is valuable in helping Aurora make the most impact in the markets she wants to lead.
Peltz's ideas align with those of Booth. As the hedge fund manager explains, "I think Aurora has a strong track record of execution, stands out clearly from its peers, has managed integration throughout the value chain and is about to move to a higher level in a range of sectors. " The billionaire mentioned "a potential commitment with mature players in the consumer market and other market segments" as part of its future work.
What Aurora will pay for Peltz
Of course, bringing Peltz on board will not be cheap. Aurora has agreed to grant options to Peltz allowing it to purchase approximately 19.96 million shares at a price of C $ 10.34 per share, which is the overall range for the shares. traded during the week preceding the announcement. Options will vest quarterly over the next four years, regardless of the outcome of Peltz's work. However, certain portions of the option grant will be eligible for accelerated vesting as soon as the price tripled and quadrupled, as well as in certain transactions defined in a formal agreement not mentioned by Aurora in its press release.
Given Aurora's history of dilution when using its shares in strategic transactions, it is not surprising to see the marijuana company using its equity again as part of its agreement with Peltz. The 20 million shares covered by the options would represent around 2% of the outstanding shares of Aurora. Specifically, if Aurora saw its share price rise to CA $ 41.36 per share, Peltz's profit would be approximately CA $ 620 million. This money will actually come from the earnings that the existing shareholders could have kept for themselves – although in this case, many would argue that without the participation of Peltz, such gains on the stock price could never occur.
Like most activist hedge fund executives, Peltz had a mixed record with some wins and other losses. Aurora's shareholders have high hopes for the billionaire's strategic advice, but that does not mean they will reap the benefits.
Dan Caplinger has no position in the mentioned actions. The Motley Fool is a short action by Procter & Gamble. Motley Fool has a disclosure policy.
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