Peltz will “work collaboratively and strategically to explore potential partnerships that would be the optimal strategic fit for successful entry into each of Auroras contemplated market segments,” Aurora said in a press release.
Aurora shares closed up 13.94 percent Wednesday following the release, its best day of trading since September. The company added that it has granted Peltz options to purchase 19.96 million common Aurora shares at a price of 10.34 Canadian dollars ($7.74). If he exercised the options, he would be the companys second-largest shareholder.
The back story. Edmonton, Alberta-based Aurora has accumulated Buy ratings lately from analysts who note its 20% market share of Canadas recreational pot sales and efficient production. Cowens Vivien Azerlaunched coverage last week, with a price target equal to $10.50. Jefferies analyst Owen Bennett noted that Aurora stock trades at a lower multiple of sales and projected cash flow than Tilray or Canopy stock.
Video: Melius Research: Nelson Peltz signing on to Aurora Cannabis is a good move
“I believe Aurora has a solid execution track record, is strongly differentiated from its peers, has achieved integration throughout the value chain and is poised to go to the next level across a range of industry verticals,” Peltz said in the release.
“I also believe that Canadian licensed producers, and Aurora in particular, are well positioned to lead in the development of the international cannabis industry as regulations evolve, with a strong, globally replicable operating model.”
The addition of Peltz to the Aurora team represents one of the largest endorsements of the nascent cannabis industry.
Peltz, who founded and serves as CEO of New York-based Trian Partners, has over the decades commanded respect across Wall Street for his investing prowess and ability to reshape companies. As an activist investor, Peltz and Trian Partners take stakes in public companies they believe are undervalued and push management to make changes over several years.
But Peltz will also prove a valuable addition to Aurora for his deep knowledge of the consumer goods industry, where hes tended to focus his investments. Current investments for the multibillion-dollar fund include a $3.6 billion stake in Procter & Gamble, an $884 million stake in packaged foods giant Mondelez and a longtime, $471 million investment in Wendys.
Trian also held shares in PepsiCo until 2016, when the activist investor ultimately dissolved its $2 billion stake after three years of deliberations with management.
“We see a number of potential of growth areas, certainly consumer packaged goods,” Michael Singer, Auroras executive chairman, said Wednesday on CNBCs “Squawk Box.” “The beverage industry, cosmetics, wellness; we see pharmaceuticals now starting to show interest in our space. There are a number of what we call market segments that we expect to operate in with one or many of these potential partners.”
The addition of the high-profile advisor increase the odds of additional strategic partnerships and is sufficient reason to upgrade Auroras stock rating to buy, GMP Securities analyst Martin Landry told clients Wednesday. The analyst nearly tripled his price target on the company to CA$15 from CA$5.50.
“Trian has been involved with a number of consumer packaged goods companies such as PepsiCo, Dr Pepper Snapple, Procter & Gamble, Kraft Foods, Heinz, Mondelez, among others,” Landry wrote. “We believe he could be instrumental in facilitating discussions with large consumer packaged goods companies.”
Founded in 2006 by CEO Terry Booth, Edmonton, Alberta-based Aurora is one of the worlds largest cannabis producers. Second in market capitalization only to Ontario-based Canopy Growth, Aurora has built revenues and earnings at a dizzying pace in recent years as more jurisdictions approve the adult use of recreational marijuana.
Last month, the company said net sales grew by 363 percent on a year-over-year basis and added that it increased kilograms sold in its second fiscal quarter to 6,999, up 162 percent from a year earlier.
But for Aurora and its peers, the addition of a renowned investor — or a celebrity like Martha Stewart, who recently partnered with Canopy Growth — will help continue to normalize an industry long pursued by global law enforcement.
“Nelson also takes a long-term view of value creation to benefit all stakeholders,” Booth said Wednesday. “We look forward to working with Nelson to further extend our global cannabis industry leadership by aligning Aurora with each of the major market segments cannabis is set to impact.”
Aurora shares are up more than 82 percent in 2019 and 25 percent in the past month, buoyed after leading cannabis analyst Vivien Azer initiated coverage on the stock with the equivalent of a buy rating.
“Aurora is well positioned to benefit in the early innings of the Canadian adult use market, given its impressive 20 percent market share,” the Cowen analyst wrote earlier this month. “The companys large cultivation footprint, capable of producing over 575,000 kilograms, provides Aurora with the necessary infrastructure to weather early storms in adult use.”
On Oct. 17, Canada became the first Group of Seven country to allow recreational use of pot. Marijuana remains illegal on a federal level in the United States, but 10 states and the District of Columbia have allowed its use for recreational purposes.
Aurora stock trades under the ticker ACB on both the New York Stock Exchange and the Toronto Stock Exchange.
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Marijuana stocks have soared to start 2019, and cannabis investors are looking at the biggest companies in the budding space as having huge potential for further growth. Aurora Cannabis (NYSE:ACB) is one of the best-known companies in the business, with unrivaled efforts to build out industry-leading growing capacity.
Yet unlike rivals like Canopy Growth and Cronos Group, Aurora hasnt yet made a major partnership with an established mature company in the consumer goods space. That looks like it might be ready to change, with Aurora announcing that hedge fund billionaire Nelson Peltz of Trian Fund Management will become the companys strategic advisor. But even though shareholders immediately celebrated the news by pushing Aurora shares up more than 10% in premarket trading following the announcement, Peltzs advice will come at a cost — and its unclear whether the move will benefit shareholders in the long run.
Nelson Peltzs history as an activist investor explains why Aurora investors are excited about the move. The billionaire hasnt shied away from high-profile efforts, including most recently his joining the board of directors of Procter & Gamble (NYSE:PG) in an attempt to shake up the slow-growth consumer goods behemoth. His influence has also had an impact at companies ranging from Mondelez and PepsiCo in the snack and beverage space to chemical company DuPont, now part of DowDuPont.
Peltz has extensive experience in the food business, and that has direct implications for Aurora. Many cannabis producers are looking closely at derivative products like edibles and cannabis-infused beverages, and Peltzs familiarity with the work involved in setting up the internal assets and logistics necessary to be successful in that area should be helpful in Auroras expansion.
In its news release announcing the move, Aurora explained that it expects Peltz to “work collaboratively and strategically to explore potential partnerships that would be the optimal strategic fit for successful entry into each of Auroras contemplated market segments.” The cannabis company also said that Peltz would help Aurora with its global expansion strategy.
Aurora CEO Terry Booth expanded his companys expectations. “Nelson is a globally recognized business visionary,” Booth said, “with a strong track record of constructive engagement to generate accelerated, profitable growth and shareholder value across many industry verticals that are of great interest to us.” Booth also likes Peltzs long-term vision and sees value in his counsel to help Aurora make maximal impact in the markets it wants to lead.
Peltzs ideas align with Booths. As the hedge fund maven explained, “I believe Aurora has a solid execution track record, is strongly differentiated from its peers, has achieved integration throughout the value chain, and is poised to go to the next level across a range of industry verticals.” The billionaire specifically pointed to “potential engagement with mature players in consumer and other market segments” as part of his future work.
Of course, bringing Peltz on board wont be inexpensive. Aurora agreed to grant Peltz options to purchase about 19.96 million shares at a price of 10.34 Canadian dollars per share, which is in the general range of where the stock was trading in the week prior to the announcement. The options will vest on a quarterly basis over the next four years regardless of the outcome of Peltzs work. However, portions of the option grant will be eligible for accelerated vesting upon the stock tripling and quadrupling in price, as well as upon certain transactions defined in a formal agreement that Aurora didnt include in its press release.
Given Auroras history of dilution through using its stock in strategic transactions, its not surprising to see the marijuana company use its equity once again in its deal with Peltz. The 20 million shares covered by the options would equate to roughly 2% of Auroras outstanding share count. In practical terms, if Aurora sees its stock price hit the CA$41.36-per-share mark, Peltzs profit would amount to roughly CA$620 million. That money will effectively come from the gains that existing shareholders might have kept for themselves — although in that event, many would argue that without Peltzs involvement, such share-price gains might never happen.
Like most activist hedge fund leaders, Peltz has had a mixed track record with some high-profile wins and other losses. Aurora shareholders have high hopes for the billionaires strategic advice, but that doesnt make it a sure thing that theyll reap the rewards.
Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool is short shares of Procter & Gamble. The Motley Fool has a disclosure policy.