• Despite its size, Aurora hasnt yet made a deal to receive investment from a major U.S. company. It brought on activist Nelson Peltz as Strategic Advisor to help change that. Shares shot up in March on the announcement.
• Several Canadian marijuana stocks dippe d in April after Cowen analyst Vivien Azer said growers could be affected by a buildup of un-sellable subpar quality cannabis. She noted that Aurora specifically could be hurt by slower retail rollout, especially in Ontario.
• A week later, Aurora got a boost after the company said it agreed to buy the remaining shares of Hempco Food and Fiber, which would help Aurora capitalize on legalized hemp in the U.S.
• Data from Canadas government showed that recreational marijuana sales in January and February were disappointingly flat with industry totals in September and October of 2018.
• Despite supply-chain struggles, Bank of America Merrill LynchsChristopher Carey initiated Aurora with a Buy rating. He said he expects that an underdeveloped supply chain will continue to crimp Canadian cannabis companies, but that in this environment his bullish stock picks like Aurora can outperform.
Auroras chief corporate officer stated in an interview with MarketWatch earlier this month that the company is “taking a different approach” to partnering outside of the cannabis industry than some of its peers have. Sure, Aurora wants a major partner. But it doesnt want to give up an equity stake to make such a deal happen.
Auroras executives didnt come up with the idea of taking a different approach to partnering, according to Battley. In March, Aurora brought billionaire investor Nelson Peltz on board as a strategic advisor. Peltz recommended that the company not start down a path where control of Aurora could eventually be handed over to a larger company.
This scenario could — and many think will — happen for both Canopy Growth and Cronos Group. Big alcoholic-beverage maker Constellation Brands owns a 38% stake in Canopy and has warrants that could up its interest to above 50%. Its a similar story for tobacco giant Altria, which owns 45% of Cronos.
But Peltz urged Auroras management team to remain independent. And instead of teaming up with just one big company outside of the cannabis industry, he advised Aurora to seek multiple partners across several industries that could be disrupted by cannabis. Aurora CEO Terry Booth and the rest of the companys top executives bought into Peltzs plan.
There are two primary advantages to this approach. First, Aurora shareholders could make even greater returns over the long run if the company achieves tremendous success as a standalone entity. Second, this approach allows Aurora to partner with several major companies outside of the cannabis industry rather than just one — which just might increase its odds of succeeding.
Aurora isnt the only major Canadian cannabis company employing this partnering strategy. Tilray hasnt given up an equity stake to a partner so far. The company has already teamed up with partners in several industries: big drugmaker Novartis, giant beer maker Anheuser-Busch InBev, and consumer brands company Authentic Brands Group. Tilrays partnering approach is arguably its biggest competitive advantage right now.
This partnering strategy that Aurora is adopting isnt perfect, though. While it could reward the companys shareholders over the long term, you could make a pretty good case that the lack of a major equity partner is holding Aurora back at least somewhat for now.
Some might argue that Auroras stock performance has been really good even without a big partner. And it has been.
But Auroras market cap is only a little over half the market cap of Canopy Growth. Yet Aurora has a greater production capacity than Canopy, has a stronger international presence, and is a close No. 2 behind Canopy in the Canadian adult-use recreational marijuana market. The most plausible explanation as to why Canopys market cap is so much higher than Auroras is that Canopy has a big partner and Aurora doesnt.
Another drawback to Auroras partnering approach is that it wont have the huge infusion of cash that comes with an equity partnership deal. Canopy Growth reported a cash stockpile of more than $4.9 billion Canadian (around US$3.7 billion) at the end of 2018. Aurora, on the other hand, had only CA$88.2 million (around US$66.8 million) in cash and cash equivalents at the end of last year.
So while Canopy Growth is flush with cash to fund its expansion efforts, Aurora must raise additional cash by either taking on more debt or issuing new shares. The company has done a lot more of the latter, announcing in April that it had filed regulatory paperwork to raise up to US$750 million by issuing new securities. The main problem with issuing new shares is that it dilutes the value of existing shares.
Theres also one other potential fly in the ointment with Auroras partnering strategy. Its entirely possible that a big partner outside of the cannabis industry is adamant about obtaining an equity stake in its cannabis partner. Aurora could conceivably lose out on winning a major partnership deal if it isnt flexible about handing over ownership interest. Maybe this wont turn out to be a problem, but it seems likely that Altria and Constellation Brands wouldnt have teamed up with Cronos and Canopy if the two cannabis producers had not been willing to give up equity stakes.
If the companys partnership deals are structured in the right way, Aurora could be in great shape. The problem for now, though, is that there arent any partners lining up at Auroras doorstep that we know about.
Still, it seems likely that Aurora will land one or more big partners in other industries. But well have to wait and see if the companys partnering strategy turns out to be brilliant or boneheaded — or maybe somewhere in between — over the long run.
Keith Speights has no position in any of the stocks mentioned. The Motley Fool recommends Anheuser-Busch InBev and Constellation Brands. The Motley Fool has a disclosure policy.