Two of Canada's major marijuana producers have agreed to the biggest deal in the country's booming pot sector after months of negotiations that started with a hostile takeover bid.
Cremona, Alta.-based Aurora Cannabis will buy rival Saskatoon-based producer CanniMed Therapeutics Inc. for $1.1 billion in what the two companies are describing as a "friendly" deal.
"We are very pleased to have come to terms with CanniMed on this powerful strategic combination that will establish a best-in-class cannabis company with operations across Canada and around the world," said Terry Booth, chief executive officer of Aurora.
The deal comes months after Aurora made its first attempt to takeover CanniMed in mid-November with a bid that valued the company's shares for up to $24.
CanniMed argued that the offer was too low, considering the volatile jump in stock market valuations for marijuana producers in recent months.
The companies started a public row with executives from both sides exchanging harsh words.
Earlier this month, CanniMed even filed a lawsuit against Aurora, claiming it had conspired to injure the company's economic interests.
On Wednesday, the companies said the new deal would amount to about $43 per share based on an implied Aurora share price of $12.65 and a 3.40 exchange ratio.
The final value of the deal, however, could fluctuate before it closes due to the volatility of marijuana stocks.
CanniMed shares closed up nearly 12 per cent on the Toronto Stock Exchange Wednesday on news of the takeover.
More deals ahead
The deal is the biggest of its kind in the Canadian industry since Canopy Growth, the country's largest marijuana producer, bought Mettrium Health for $430 million in 2016.
With the CanniMed acquisition, Aurora will become one of the country's biggest marijuana producers by market capitalization.
Russell Stanley, analyst at Echelon Wealth Partners, said the sector will definitely see more consolidation this year as Canada legalizes the recreational use of marijuana.
Canada is set to become the first G7 country to allow recreational use of marijuana by the summer.
"I do expect more transactions to follow. I think it's a question of when and not if, and who the dance partners will be," Stanley said.
"The largest cannabis companies in the space trade at higher multiples than the smaller names, and that means they have strong acquisition currency to use for transactions like this," he added.
The deal means CanniMed will have to abandon plans to buy Newstrike Resources, which will cost the producer a $9.5 million break free as Newstrike shareholders had already agreed to the takeover.
Looking ahead, Stanley said we could see more mergers and acquisitions in the sector that would not just be about "buying scale."
"We could transactions that could give companies better geographic exposure or strength on different product development," he said. "I don't think they'll all just be about size."
Vahan Ajamian, an analyst at Beacon Securities, agreed with that sentiment, saying it was too late now for marijuana producers to grow their businesses organically in time to meet the demand from this summer.
"One way to get faster access to capacity is to make more acquisitions," he said.
"We'll probably see a lot more marriages where what province you're in matters and what types of products you can offer matters, in addition to getting more brute quantity of what you can sell."