Aurora Cannabis (TSX: ACB) continued its hot streak on Thursday — with shares of the Canadian producer rising another 35 per cent — after it announced a deal to enter the U.S. CBD market.
Late Wednesday, the Edmonton-based company said it will acquire American CBD producer Reliva for US$40 million in Aurora common shares.
Image via Reliva, LLC
Massachusetts-headquartered Reliva says its hemp-derived CBD lotions, gummies, drinks and pet products are sold in over 20,000 retail locations inside the U.S., including Circle K convenience stores. The products all sell for less than US$20 and the brand ranks second overall in the U.S. CBD market, according to research firm IRI.
Aurora said the acquisition includes up to US$45 million in cash and stock bonuses if Reliva hits certain two-year financial targets. The deal is expected to close in June.
Aurora said it planned to enter the U.S. CBD market last fall, but since then has been peeling back expansion projects while cutting 500 workers in search for efficiency and year-end profit targets.
However, the company said purchasing Reliva made sense after a “multi-month strategic evaluation of the U.S. hemp-derived CBD industry.”
In its statement, Aurora noted how Reliva is debt free, has generated positive cash flow in the last 12 months ended March, and no additional capital will be required to keep the business chugging along. Reliva recorded sales of $14 million in the year ended February.
“We have taken the time necessary to carefully assess the company’s entry into the U.S. market and we firmly believe that the combination with Reliva will create significant long-term value as Reliva provides us options to grow in hemp-derived CBD internationally,” CEO Michael Singer said in the statement.
Today, we’re uniting two of North America’s leading #cannabis companies.
By acquiring Reliva, Aurora is positioned to be a meaningful player in the United States – the world’s largest cannabinoid market. #WeAreAurora 1/3 pic.twitter.com/hrb033ylQu
— Aurora Cannabis (@Aurora_MMJ) May 20, 2020
Aurora bullish on US CBD market despite murky regulations
Aurora said it will place Reliva CEO Miguel Martin as president of its Aurora USA subsidiary. The company touts Martin’s 25 years in the consumer packaged goods space, including senior management roles with major vape manufacturer Logic Technology, and Altria, the maker of Marlboro cigarettes.
The company said the deal will help it create a leading market position in hemp-derived CBD in the U.S., which is also the world’s largest cannabinoid market.
According to Brightfield Group, a cannabis insights firm, CBD retail sales are expected to climb to US$24 billion by 2025.
Aurora said the deal will also bolster its partnership with the Ultimate Fighting Championship to develop CBD topicals for athletes. The two enterprises joined forces last year to research CBD products on fighters while introducing the topical brand ROAR Sports.
But even though Gallup reported last year that one-in-seven Americans are using CBD products, interest in the vaunted wellness compound appears to be waning.
Charlotte’s Web (TSX: CWEB), the leader of U.S. CBD sales by market share, reported sequential quarters of declining revenues for its hemp-based products.
Read more: Revenue growth stagnates for Charlotte’s Web
After a public consultation was held last May 31, the U.S. Food and Drug Administration has yet to issue regulations on hemp-based CBD ingestibles, dietary supplements and pet products.
The U.S. FDA has yet to issue a regulatory framework on CBD in food, drinks and supplements. Deposit Photos
Since U.S. Congress passed the farm bill in December 2018, CBD that’s derived from hemp became legal to sell inside America creating a surge of interest in the potential healing properties of the extract. CBD, short for cannabidiol, is non-intoxicating unlike its more popular cannabinoid cousin THC, or tetrahydrocannabinol, which causes the high in users and remains federally illegal in America.
While CBD has been marketed to treat everything from anxiety to acne, there is little scientific research available today on CBD as an effective treatment for various ailments other than a few forms of rare childhood epilepsy.
Read more: FDA’s update on CBD regulations is ‘frankly absurd’
Over the last year, the FDA has issued numerous warning letters to CBD sellers — including multi-state cannabis operator Curaleaf (CSE: CURA) — for marketing products online as being able to treat diseases or provide therapeutic benefits for humans and pets.
But Aurora said Reliva’s focus on regulatory, testing and compliance protocols in the CBD space was a big reason for inking the deal.
Shares of the company rose $6.29 on the Toronto Stock Exchange by the end of Thursday’s trading session.
Since posting rising third-quarter revenues on May 14, Aurora’s share price has rallied 162 per cent. But ACB has fallen more than 82 per cent in the last 12 months overall despite Thurday’s gains.
Read more: Aurora’s stock rallies on rising revenue
Top image via Reliva
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