“Let me contain my excitement.”
That’s what a young hockey player said to me when I was a reporter for The Sports Network in another life and showed up with a cameraman to do a story on a team in Toronto that had made the papers because of an epic losing streak.
I thought that was a clever line from someone who was not even a teen yet.
And that’s what I said to myself when I heard Aurora Cannabis (TSX:ACB) and Aphria (TSX:APHA) had recently discussed a merger and that research analysts were weighing in on the merits of the possible tie-up.
Actually, my initial thought was who cares?
I know I’m supposed to be open-minded and consider business stories and possible investments with a dispassionate, reasoned and analytical view. But, really? Cannabis? We’re still talking about this?
Okay, my opinion is likely more jaundiced than most having spent a good deal of time the last few years covering the cannabis sector and interviewing CEOs of various companies, and Gene Simmons of Kiss, for heaven’s sake, who was the Chief Evangelist Officer for Invictus MD Strategies.
How did that work out?
Simmons kissed off the company last year, Invictus filed for creditor protection earlier this year and the common shareholders got wiped out. For anyone who has followed the cannabis industry’s rise and fall and current malaise, the Invictus story is a microcosm of the sector.
And for anyone who’s followed the stock market long enough, the story of boom and bust is a familiar one. The smart money – investment banks, hedge funds, private investors – get in early, make some good money and run. And the dumb money – retail investors – are left with the entrails.
I wasn’t smart enough or well enough connected to make any real money on cannabis. I made a smattering in a few investments and still have a few stocks that went sour and are languishing at the bottom of my personal account (I know, I should blow them out), which will probably never recover. Luckily, none of those investments added up to anything material.
So forgive me if I’m less than enthused about a possible merger between Aurora and Aphria, two companies that have left hundreds of millions of dollars of write-offs, layoffs and a bad smell in their wake, and are now desperately trying to resurrect some semblance of their early promise.
I interviewed former Aphria CEO Vic Neufeld a couple of times before he left the company under a cloud. Once in a studio and another at the company’s facility in Leamington, Ontario. Affable and accommodating guy. I saw Vic in Vancouver several months ago, pre-pandemic, and he gave me a hug.
And, full disclosure, I went to Aphria’s party in Toronto on the eve of marijuana legalization in Canada. I left early. Unfortunately, many retail investors overall stayed at the cannabis party way too late and got burned.
Could Aurora and Aphria, with combined markets caps of about $3.7 billion, create a viable business? Maybe.
The story that the two companies were in advanced talks up until late last week was first reported by BNN Bloomberg reporter David George-Cosh. The article said the combined entity would have about a 30 per cent share of Canada’s recreational cannabis market with about $800 million in annual revenue.
Aphria appears to be in better shape than Aurora having turned a profit in its most recent quarter and is sitting on about CAD$369 million in cash, while Aurora has taken more than $1 billion in write-offs and laid off about 1,200 employees.
The BNN story engaged in a bit of hyperbole, however, when it said a merger would be a “blockbuster” and create a “behemoth”. Aurora’s stock peaked in October of 2018 at more than $164 a share (five days before legalization in Canada). Then, it was a behemoth. Now, at about $16 a share, not so much.
Stifel analyst Andrew Carter thinks a deal “could still come to fruition” and would…”establish a clear leader in the Canadian adult-use market.” Bear in mind that Carter upgraded Aurora in January to a “buy” rating when the stock traded at nearly $29 a share, then later cut it to a “sell”.
Michael Gorenstein, the CEO of Cronos Group (TSX:CRON), told me in an interview a few years ago that, like any industry, the cannabis sector will eventually be dominated by a handful of larger players.
An Aurora/Aphria deal may be a step in that direction in what is still a fragmented landscape. Just don’t expect me to take much interest.
Yes, there will be long-term winners.
Trulieve (CSE:TRUL), for example, looks interesting based on my rudimentary research. It’s a U.S. operator with a Florida focus and is one of the few with impressive revenue and adjusted profit growth and has US$100 million in cash.
But Aurora and Aphria? Come on. That’s like the proverbial two drunks in a bar leaning against each other to hold each other up.
That’s like Nortel Networks and JDS Uniphase merging…in 2002!
Also watch my interview with Gene Simmons which is not about cannabis but his inspiration to be an entrepreneur and his best-ever investment. I thoroughly enjoyed this. He’s a smart and entertaining guy. The interview starts at 1:33.
If you’re interested in the cannabis sector the New Cannabis Ventures website is an excellent resource.