Aurora Cannabis (ACB) announced it has made a big move into the U.S. market via its acquisition of Reliva, LLC, one of the major players in America.
The company said the at close the deal will be "immediately accretive to shareholders on an adjusted EBITDA basis."
In this article we'll look at some of the strengths the two companies will complement each other with, and what means for the long-term prospects of Aurora.
The deal
The two companies have agreed to have Aurora buy up "all of the issued and outstanding membership interests of Reliva."
Per terms of the deal, Reliva members will receive about US$40 million of Aurora common shares. The members could receive up to US$45 million in earn-out in Aurora shares, cash, or a combination of the two, if Reliva reaches specific financial targets over the next two years.
The deal is scheduled to close in June 2020, subject to normal closing conditions.
This aligns nicely with Aurora's goal of reaching adjusted EBITDA profitability in the first fiscal quarter of 2021, with expectations the deal will be accretive to Aurora right away.
Why it matters
Aurora has been on a hot streak lately because of its surprising revenue beat in the last quarter, and while it was coming down to earth after the initial response from investors that drove its share price up, it has rebounded again on this positive news.
What the deal adds to Aurora is it opens up the door to the U.S. hemp-derived CBD market. At this time Reliva sells its CBD brands in over 20,000 retail locations spread across the U.S.
Also, as of March 2019, Reliva has generated positive EBITDA over the prior 12 months. Reliva is debt free as well. As of now, there is no need to provide working capital or any additional capital expenditures to Reliva. That also aligns well with the company's strategy of lowering costs and expenditures going forward.
The company also gets packaged goods veteran Miguel Martin, who was named president of Aurora USA.
Last but not least, Reliva has a solid record of successfully navigating the regulatory waters of the U.S. CBD market, and has been able to produce products and brands that are compliant with required standards.
Leveraging the potential
Reliva is the top ranked U.S. company in topicals, and is second in total market share in the U.S., according to IRI. Along with its 20,000-plus locations in the U.S. market, it also sells direct through its e-commerce platform.
While that potential is obvious, where it really stands out is in the international presence of Aurora, where it has the largest footprint of all the cannabis producers in the world. Being able to leverage Reliva's CBD products across those various markets should quickly boost international sales, adding to the significant revenue Revila will bring in through existing sales.
My view is that the criticism over Aurora's seemingly slow move into the U.S. market was excessive, as I've written a number of times, the company knew this was a huge decision, and now that we know the positive impact it'll have on the performance of Aurora, it's readily apparent the time it took to research and secure the deal warranted the time it took to do so. Almost everything associated with the deal aligns with the strategy being deployed by Aurora to generate long-term revenue and earnings.
Combining the U.S. distributorship network of Reliva with the international distributorship network of Aurora, is a potent combination that is going to be difficult to compete against once it ramps up.
Conclusion
It has been a while since positive sentiment has been associated with Aurora Cannabis, but with the results of its recent earnings report and the latest acquisition of U.S. CBD giant Reliva, it's clear Aurora has turned the corner and has little to stop it from sustainable growth going forward.
That said, it still needs to be understood that some of the segments Aurora competes in will experience incremental growth. Even so, the inclusion of Reliva in its results in the second half of calendar 2020 and calendar full-year 2021 is going to result in a much different, and improved performance for the cannabis giant.
Bottom line is Aurora Cannabis made a great acquisition here, and it will quickly improve its numbers in the near and long term.
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