Market Not Fully Buying Into Aurora Cannabis Inc-MedReleaf Corp Acquisition… Yet

It appears some market participants aren’t fully buying into the Aurora Cannabis Inc (TSE:ACB) (OTCQB:ACBFF) (FRA:21P) friendly acquisition of MedReleaf Corp (TSE:LEAF) (OTCMKTS:MEDFF). Spreads between acquirer and the acquired remained significantly elevated by the close, despite the amicable nature of the deal. This sets up a potential double-digit arbitrage opportunity, should one feel confident the deal will pass muster with both shareholder classes. We explore.

To quickly recap the news heard around the sector, Aurora Cannabis agreed to purchase MedReleaf in an all stock deal worth $3.2 billion fully diluted. Holders of MedReleaf common shares will receive 3.575 common shares of Aurora for each MedReleaf common share held, based on the 20-day volume weighted average prices of both company’s common shares on the Toronto Stock Exchange as of May 11, 2018. This represented a 34% premium to MedReleaf investors, before trade on May 14.

Based on Aurora’s closing price of $7.90/share, MedReleaf should trade at a theoretical value of $28.24/share. Obviously, due to inherent break up risks, some risk premium should exist. But with MedReleaf closing at $25.26/share—or an ↓11.80% discount to the acquisition price, accounting for Aurora’s $0.17 move lower—it’s clear investors don’t believe the deal is a slam dunk. This is especially notable since the deal comes with a hefty $80 million breakup fee, plus $15 million expense reimbursement fee if the Transaction is terminated in certain other specified circumstances. Nobody half-interested participant would subject themselves to such conditions.

Although Aurora Cannabis did bust-out of a buyout commitment with Newstrike Resources Ltd. in the past—paying the required $9.5 million breakup fee as compensation—the MedReleaf deal is a much different situation. Aurora Cannabis has already proven that short term dilution is not an inhibiting factor to obtaining a leading position in the medicinal cannabis market. It knows exactly what it’s getting into here, and is acting in a proactive (as opposed to reactive) manner.

From where I sit (and I’m not an insider), the deal stands a very good chance of materializing. Careful due diligence was conducted, a fairness opinion were solicited from GMP Securities, and an independent financial diligence report from Deloitte LLP was obtained. By all accounts, MedReleaf is gung-ho towards being acquired, having shopped itself around to several suitors. Aurora has already shown dilution is no option.

Now, it will be up to the Board of Directors of both companies to make sure big institutional shareholders fall in-line. For MedReleaf, that will require approval by at least 66 2/3% of the votes cast by the shareholders of MedReleaf present at a special meeting; for Aurora, a simple majority vote will suffice. In addition, it was reported that 56% of MedReleaf’s issued and outstanding common shares have entered into irrevocable hard lock-ups to vote their shares in favour of the Transaction.

Barring an Aurora shareholder revolt or ACB stock price nosedive, one could reason assume the barriers of disapproval are fairly benign. If so, the current arbitrage opportunity looks tempting. As we are not in the business of giving specific investment advice, we shall stop there. But for a fleeting moment, the market is giving a rare potential opportunity to extract double-digit gains for a deal that both sides look determined to accomplish.

Original article: Market Not Fully Buying Into Aurora Cannabis Inc-MedReleaf Corp Acquisition… Yet

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