With Aurora Cannabis Inc. (TSE:ACB) aiming for the top spot in the industry with significant investments in production capacity expansions, Aphria Inc. (TSE:APH) would be an ideal merger target
SmallCapPower | November 30, 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 Corporation (TSX:WEED), Aphria Inc. (TSX:APH), and Aurora Cannabis Inc. (TSX:ACB) are likely actively seeking opportunities to acquire smaller companies or merge with other players to capture market share. Going forward, we could possibly see many such deals as the Canadian cannabis sector starts to consolidate.
For Our Complete Coverage Of Canadian Marijuana Stocks Click Here
In this article, we will discuss one such potential merger of Aurora Cannabis with Aphria along with the benefits. These are the only two companies with the scope, scale, and differentiation to take on Canopy Growth.
Key reasons the merger could be an attractive deal for Aurora Cannabis and Aphria
Combined production capacity to mitigate supply shortages
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.
Currently producing ~9,000 kgs of cannabis annually, Aphria plans to boost its capacity to meet the large recreational opportunity expected in Canada in mid-2018, as well as growing legal cannabis opportunities internationally. Post the completion of its rapidly-progressing four-part expansion of its facility in Leamington, Ontario, the greenhouse growing footprint of Aphria will increase to one million square feet with production capacity rising to over 100,000 kgs of cannabis. On the other side, the construction of the Aurora Sky facility at the Edmonton International Airport in Alberta is progressing well. At 800,000 square feet, with modern technology and automation, Aurora Sky is expected to produce over 100,000 kgs annually and deliver significant economies of scale for Aurora Cannabis. Located on Edmonton International Airport land, with access to ample power, Aurora Sky is ideally positioned for increased domestic and international distribution.
Both companies are aggressively expanding their production capacity to meet the future demand. A potential combined entity would have future production of 200,000 kgs, which is double the expected capacity of Canopy Growth of 100,000 kgs.
Reduce cost of production
The cost to produce cannabis will significantly define the margin levels, so it is important to compare this metric for the combined entity. This is a factor that will scale in importance as revenues grow.
Aphria prides itself as one of the low-cost producers in the marijuana industry. In 1QFY18, the Company reported a 4% QoQ reduction in production costs to $1.61/gm. On the other side, Aurora Cannabis has production cost of $1.73/gm as per the latest quarter. Combination of these two low production cost companies could further decrease the production due to the improved growing techniques and increased production capacity.
Other key highlights if a possible merger goes through
- Substantial synergy through the creation of a global leader in the cannabis industry with a pro-forma market capitalization exceeding $5.0 billion
- Expanded international presence – a strengthened international presence with operations and agreements across North America, the European Union and Australia
- Increased oil production – high throughput oil production through Aurora’s strategic extraction partner Radient Technologies to satisfy growing international demand
- eCommerce – enabling Aphria to leverage Aurora’s unparalleled eCommerce platform, including the only mobile app in Canada that enables customer purchases
- Strong cash position and balance sheet fueling rapid growth – sector-leading cash position and balance sheet will enable faster roll-out of initiatives to accelerate growth
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, Aphria would be an ideal merger target given the multiple benefits discussed above.
Disclosure: Neither the author nor any of the principals at SmallCapPower, or their family members, own units in any of the companies mentioned above.
To read our full disclosure, please click on the button below:
