Aurora Cannabis Acquisition of Cronos Group Makes Sense

Cronos Group (CVE:MJN) would help Aurora Cannabis Inc. (TSE:ACB) boost its international presence, especially in Germany

SmallCapPower | November 9, 2017: With recreational marijuana legalization in Canada expected in July 2018, Canadian Licensed Producers are scrambling to meet market demand that is expected to exceed the available supply. During the past few months, the industry has witnessed decent M&A activity and a number of capital raises. Top players like Canopy Growth, Aphria, and Aurora Cannabis Inc. (TSX:ACB) are likely actively seeking opportunities to acquire smaller companies, such as Cronos Group Inc. (TSXV:MJN), to capture the market share. Going forward, we could possibly see many such deals as the cannabis industry starts to consolidate.

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In this article, we will discuss one such potential deal that Aurora Cannabis could execute along with the potential benefits.

If Aurora Cannabis plans to buy Cronos Group, it could benefit in the following areas:

  • Diversified business of Cronos
  • Production capacity to mitigate supply shortage both in domestic and International markets
  • Reduce cost of production
  • Distribution deal in Germany

Diversified Business

Cronos Group is an investment firm that invests primarily in Canada-based marijuana companies involved in Canada’s medical-marijuana industry. Cronos Group has ownership in following companies: Peace Naturals, OGBC, Whistler Medical Marijuana Company (WMMC), Evergreen Medicinal Supply, AbCann Global Corp and The Hydropothecary Corp.

Cronos, with its half-dozen investments, ensures that it isn’t wholly reliant on a single company. So even if one company fails, Cronos Group can lean on its other subsidiaries and investments as a hedge.

Production Capacity

There is currently a lack of supply in the industry. Additionally, the upcoming Canadian legalization of marijuana in July 2018, for recreational use, will further drive demand. So, this plays an important role going forward.

  • The Peace Naturals Project: Cronos Group owns 100% of Peace Naturals, a company licensed to produce and sell medical marijuana as well as cultivate cannabis oil, acting under the authority of a license issued by Health Canada pursuant to the Access to Cannabis for Medical Purposes Regulation (ACMPR). Located in Simcoe County, Ontario, Peace Naturals has 95 acres of land.
  • Current production capacity of 5,000kgs
  • 40,000kgs by the end of 2019
  • Kibbutz Gan Shmuel: Strategic joint venture with Kibbutz Gan Shmuel, which already exports to 35 countries throughout Europe and Asia.
    • Situated on 4,939 acres of mixed-use agricultural/industrial land, with ability to expand beyond 100,000 kgs annually

Production Cost

Reducing the production cost will significantly improve margins

  • Kibbutz Gan Shmuel: Ideal climate in Israel will enable production of high-quality medical cannabis at an expected cost of between $0.40 and $0.50/g

Distribution

While the market in Canada is a big enough opportunity on its own, the potential to expand into international markets brings the scope of the available opportunity to a whole new level.

Partnership in Germany: Cronos Group recently signed an exclusive supply agreement with Pohl-Boskamp, an international pharmaceutical manufacturer and supplier. Pohl-Boskamp distributes its products to over 12,000 pharmacies. Aurora Cannabis has also started supplying medical cannabis to Germany through Pedanois, which distributes medical cannabis to 750 pharmacies.

With 82 million people, Germany is the largest federally legal medical cannabis market in the world. But there is a large shortage of medical cannabis in Germany at this time. So, getting a deal with right the distributor will be the key for capturing the market.

Conclusion

The cannabis industry in Canada is highly fragmented and consolidation is likely to accelerate going forward. With Aurora Cannabis aiming for the top spot in the industry with significant investments in production capacity expansions, both organic and in-organic, Cronos Group would be an ideal acquisition target given the multiple benefits discussed above.

Disclosure: Neither the author nor any of the principals at SmallCapPower, or their family members, own shares in any of the companies mentioned above.

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