Aurora Cannabis Makes Inroads Into South America With Latest Acquisition

Aurora Cannabis (TSE: ACB) has been pretty active on the M&A front, purchasing at least 10 companies in the past 2 years. While the primary motive for those was to increase the production capacity in time for the legalization of recreational marijuana in Canada, this time around the reason appears to be different. ACB announced its intention to acquire ICC Labs Inc. (TSX-V: ICC) for CAD 1.95 per share, reflecting a 34% premium to the company’s 20-day volume-weighted average trading price as of Aug. 22, the day when rumors started floating regarding the imminent purchase. ICC is a leader in the South American cannabis market, and has over 70% market share in Uruguay, the first country in the world to legalize cannabis for adult consumer use.  Besides this, the company also holds licenses in Colombia for the production of medical cannabis, and has an agreement to export cannabidiol (CBD) products to Mexico and Brazil. Through this acquisition, Aurora will be able to leverage ICC’s market-leading position in South America, and aid the latter in its expansion plans. With many cannabis companies looking to partner with alcoholic beverage giants to enter the cannabis edibles space, such as the $4 billion investment by alcoholic beverage giant Constellation Brands (NYSE: STZ) into Canopy Growth Corp, or the deal between Molson Coors Brewing Co (NYSE:TAP) and Hydropothecary, Aurora at the moment seems content with driving growth through acquisitions.

We have arrived at a CAD 12.50 price estimate for Aurora Cannabis based on revenue projections of CAD 450 million for FY 2019, a P/S multiple of 25, and a share count of 900 million. The market price stood at CAD 8.26 as of September 10, 2018, implying our price estimate is at a significant premium. We have created an interactive dashboard analysis on Our Outlook For Aurora Cannabis In FY 2019 (year ended June 30, 2019). If you disagree with our forecast, you can make changes to these variables to arrive at your own price estimate for the stock.

Why The Acquisition Makes Sense:

1. Significant Growth Opportunity: Uruguay is the only country where regulations currently permit the cultivation of CBD-rich hemp on a commercial scale. Moreover, ICC is one of two companies that have been given the license to grow cannabis for Uruguay’s recreational market. ICC’s extensive background in pharma and the ability to grow low-cost CBD-rich hemp at a very large scale, positions the combined company exceptionally well to benefit from global opportunities in the high-growth CBD wellness market.

2. Scope For International Expansion: ICC recently launched its BIDIOL brand of CBD products, and is developing a broad international distribution network. In this regard, the company has signed a presales agreement to export such products to Mexico, a market with over 125 million people. Furthermore, given the fact that ICC’s new CBD extraction facility is located at a short distance from the Canelones international airport and within Uruguay’s “Science Park” free trade zone, it exempts the company from paying local tax on the facility’s exports and imports. ICC is also close to completing its cannabis science laboratory, which will be a first for South America. Once it receives the certification, it will help to drive sales growth in other countries, as the facility is made in line with international standards. Given ICC’s presence in the continent, the acquisition should provide Aurora a first-mover advantage in South America, home to over 420 million people.

3. Meaningful Production Capacity: ICC is expanding rapidly, with both established facilities and a number of projects nearing completion, to bring the estimated production capacity to over 450,000 kg per annum, adding significant value to Aurora’s funded footprint. According to Fernanda Boidi, with the Latin American Marijuana Research Initiative and Uruguay’s Insights Research Group, Uruguay is currently facing a cannabis shortage, and hence, the acquisition by Aurora may help to overcome this.

4. Diverse Product Range: ICC offers a broad portfolio of dried flower and higher margin products, including tablets, softcaps, ointments, creams, drops, infused syrups, and patches. The company has also secured a portfolio of high CBD strains that are exclusive to ICC in South America, and are stated to be highly sought after.

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