Aurora Cannabis Buys Out Remaining Stake In Hempco (NYSE:ACB) – Benzinga

Aurora Cannabis Buys Out Remaining Stake In Hempco (NYSE:ACB) - Benzinga
Aurora Purchases Remaining Stake of Hempco in Deal Valued at C$63.4 Million
Canada-based Aurora Cannabis Inc. ACB, +4.99% ACB, +4.66% announced Tuesday an agreement to buy the Hempco Food and Fiber Inc. shares HEMP, +12.09% it doesnt already own in a deal that values Hempco at C$63.4 million ($47.4 million). Auroras U.S.-listed shares rose 0.7% in premarket trade, after falling 4.2% on Monday to close at a 1-month low. Under terms of the deal, Aurora will pay C$1.04 for each of the 48% of Hempco shares outstanding that it doesnt own, which is 14% above Mondays closing price. "This transaction will enable us to fully integrate Hempco and its new Nisku processing facility into Auroras global hemp operations including Agropro, Borela and ICC," said Aurora Chief Executive Terry Booth. "Our goal is to strengthen our CBD-from-hemp supply chain as well as our hemp business of hemp-based superfoods, nutraceuticals and fibers." Auroras stock has run up 71.6% year to date through Monday, while Hempco shares have lost 13.3%, the ETFMG Alternative Harvest ETF MJ, +1.04% has rallied 35.9% and the S&P 500 SPX, +0.09% has gained 15.9%.

Swedens government-run AP7 pension fund first bought shares in Aurora and Canopy Growth in 2018, according to Swedish business magazine Affärsvärlden. The AP7 pension fund initially invested 63 million Swedish kronor, with the valuation since then soaring to 100 million Swedish kronor this spring, according to a report from Swedens public television broadcaster, SVT News.

Why is this Swedish government pension fund investing in pot? And why Aurora Cannabis and Canopy Growth? Theres a simple explanation.

The AP7 Equity Fund invests in nearly any stock that is included in the MSCI ACWI Index. The only exceptions are stocks that AP7 has blacklisted for some reason.

AP7 seeks wide global exposure to equities with its pension fund. It makes sense that the fund uses the MCSI ACWI Index. This indexs holdings include more than 2,700 stocks across 11 sectors in 23 developed markets and 24 emerging markets.

Cannabis grower Aurora Cannabis Inc (NYSE: ACB) on Tuesday announced a deal that will help it further cement its position as a vertically integrated cannabis company.

So when Aurora Cannabis and Canopy Growth were added to the MSCI ACWI Index in 2018, AP7 scooped up shares of both stocks. The Council on Ethics of Swedens AP Funds recommended against buying cannabis stocks. But the AP7 Funds managers chose to ignore that recommendation. 

At this point, AP7 hasnt blacklisted cannabis stocks. However, Johan Floren, head of communications and market management at AP7, stated that its possible that cannabis stocks could be included on the AP7 fund blacklist in the future, according to Affarsvarlden.  

The deal is expected to close in the second quarter of 2019, with a definitive agreement likely to be signed on or before May 15.

Sweden isnt the first government entity to buy marijuana stocks. Canadas Public Sector Pension Investment Board (PSP) bought shares of four marijuana producers last year — Aurora, Canopy Growth, Aphria, and Cronos Group.

Aurora initially made an investment in Hempco in 2017 and currently owns 52 percent of the outstanding Hempco shares.

At the end of 2018, PSPs biggest cannabis stake was in Canopy Growth, with its position then valued at nearly $14.9 million. Aurora Cannabis was the pension funds second-largest cannabis holding with a valuation at the end of last year of $12.7 million. PSPs stakes in Aphria and Cronos Group were roughly $3.2 million and $4.5 million, respectively.

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Last year, the California Public Employees Retirement System (CalPERS) also invested in two marijuana stocks. CalPERS bought stakes in Canadian marijuana producer Tilray and cannabis-focused biotech Insys Therapeutics. Both were relatively small positions, however, of a few hundred thousand dollars.

CalPERS invested in alcoholic beverage maker Constellation Brands several years ago. This turned into an indirect investment in Canopy Growth as well in 2017 when Constellation bought a 9.9% stake in Canopy Growth. Constellation followed up in 2018 by investing another $4 billion to up its ownership of Canopy Growth to 38%.

Does it really matter that government-run pension funds are buying shares of marijuana stocks like Aurora Cannabis and Canopy Growth? Yes and no.

On one hand, pension funds buy hundreds of stocks to better diversify their holdings. Its one thing when a pension fund carefully considers a given marijuana stock and determines that its likely to outperform the market over the long run. Its another thing altogether when a pension fund like Swedens AP7 buys Aurora and Canopy solely because the stocks were added to an index.

However, the mere fact that pension funds are buying marijuana stocks is important for other investors considering jumping on the cannabis bandwagon for one primary reason: legitimization. For a long time, many considered marijuana stocks as purely speculative and extremely risky. But when government entities put money intended to fund public employees retirement in marijuana stocks, it sends a strong signal that at least some of these stocks arent as speculative and risky as previously believed. 

Dont go out and buy Aurora Cannabis, Canopy Growth, or any other marijuana stock just because the pension funds of Sweden, Canada, or California are doing so. But the global cannabis industry presents a real opportunity with real prospects of significant returns over the long run. When pension funds start investing in an industry, its worth paying attention to that industry.

Keith Speights has no position in any of the stocks mentioned. The Motley Fool recommends Constellation Brands. The Motley Fool has a disclosure policy.


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