Aurora Cannabis Inc. Investors: More Dilution Is Ahead

On Friday, Aurora Cannabis Inc. (TSX:ACB) announced it has agreed to terms with CanniMed Therapeutics Inc. (TSX:CMED) and will begin integrating the firm. Here’s what it means for shareholders in terms of dilution.

| More on:

This past week, one of Canada’s largest marijuana producers, Aurora Cannabis Inc. (TSX:ACB) announced it has been successful in garnering a buy-in from shareholders of CanniMed Therapeutics Inc. (TSX:CMED). Friday was the deadline for the two firms to come to an understanding on how the $1.1 billion acquisition would be financed, and, unsurprisingly, the vast majority of the deal will be financed via a 50.6 million share issuance, which has yet to fully be tendered.

The finalized deal will see CanniMed shareholders receive less than 10% of the acquisition price in cash ($98 million total), with the remaining amount coming via yet another share issuance by the upstart marijuana producer. While CanniMed shareholders may have wanted more in the way of cash from this transaction, the reality remains that like its peers, Aurora is currently burning through a significant amount of cash, and as such, it will need to closely monitor its liquidity moving forward to properly integrate all the acquisitions the company has on the table.

As fellow Fool contributor Brian Paradza has laid out in his recent piece, Aurora has a lot going on right now. Between this mega-acquisition and the more than $100 million Aurora agreed to pay to acquire a holding in Liquor Stores N.A. Ltd. — a deal I believe to be one of the most strategic out of the bunch for Canadian marijuana producers in general — as well as a recent $55 million private placement deal Aurora has agreed to be a part of with The Green Organic Dutchman, cash is a scarce commodity these days.

As any start-up business will tell you, the pace at which a company burns through cash is often one of the best indicators of how well management is doing early on. Spending money to ramp up capacity and gain market share early is important for all Canadian cannabis firms; however, doing so while limiting the amount of cash that needs to be spent is an important task for management.

Share issuances, therefore, are often the direction such companies choose to go. The impacts on existing shareholders (dilution) are often ignored when share prices continue to rise over extended periods of time. It is in periods of stock price stagnation (like now) when investors begin to analyze what the impact of new shares may be on their holding positions.

Much of the recent dilution Aurora shareholders have experienced has gone under the radar due to stock price appreciation linked to valuation multiple expansion. Below is a chart highlighting the number of shares outstanding for the firm over the past five years.

Year # of shares outstanding
2013 16.03 million
2014 16.15 million
2015 76.94 million
2016 128.99 million
2017 279.03 million
2018 398.67 million + (???)

Source: Morningstar

As of the most recent tally of YTD shares outstanding, the five-year growth rate relating to Aurora’s share count has been 2,487%, or a compounded annual growth rate (CAGR) of more than 90%!

As with any investment, when the pie is split up among more people, share prices tend to decline in periods of slower-than-anticipated growth. Unless you’re planning on pouring more cash into firms like Aurora or expect to see valuation multiples continue to move beyond obscene toward fantasy-like levels, share prices for companies like Aurora will continue to drop, or at least stagnate, until the share issuances stop.

It’s just math.

Stay Foolish, my friends.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Chris MacDonald has no position in any stocks mentioned in this article.

More on Investing

Canadian dollars in a magnifying glass
Dividend Stocks

3 High-Yield Dividend Stocks That Are Screaming Buys Right Now

Are you looking for great income stocks? Here's a trio of high-yield dividend stocks that pay insane yields right now.

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Bank Stocks

Best Stock to Buy Right Now: TD Bank or Manulife Financial?

Manulife continues to see momentum in its business and stock price, while TD Bank stock remains down and out.

Read more »

cloud computing
Tech Stocks

3 No-Brainer Tech Stocks to Buy With $1,000 Right Now

These three Canadian tech stocks could be among the best growth opportunities in the market right now.

Read more »

Piggy bank with word TFSA for tax-free savings accounts.
Dividend Stocks

Transform a $5,000 TFSA Into a $50,000 Retirement Nest Egg

The TFSA is a powerful tool that can grow a small investment into a substantial retirement nest egg over time.

Read more »

Canadian Dollars bills
Metals and Mining Stocks

2 Cheap Canadian Stocks Under $20 to Buy This November

Cheap TSX stocks such as Endeavour Silver are trading at an attractive valuation in November 2024.

Read more »

happy woman throws cash
Tech Stocks

3 Growth Stocks That Could Be Long-Term Wealth Creators

These three growth stocks aim to grow their financials at a higher rate than the industry average, thus delivering superior…

Read more »

how to save money
Bank Stocks

This 5.9% Dividend Stock Pays Cash Every Month

First National Financial (TSX:FN) has a 5.9% yielding dividend that is paid out monthly.

Read more »

gift is bigger than the other
Investing

The Best Canadian Stocks to Buy With $5,000

These Canadian companies have solid growth prospects and the ability to deliver profitable growth even at a large scale.

Read more »