Aurora Cannabis (OTC:ACB) announced a small deal to acquire a CBD company in the U.S. for $40 million in shares. We think the deal is too small to make a meaningful difference to the company. The timing of the deal is also questionable. The U.S. CBD industry is facing an oversupply due to low barriers…
Aurora Cannabis ( OTC: ACB) revealed a little deal to acquire a CBD business in the U.S. for $40 million in shares. We believe the deal is too small to make a meaningful difference to the business. The timing of the offer is likewise questionable. The U.S. CBD market is dealing with an oversupply due to low barriers of entry and ample supply of inexpensive hemp raw materials. Entering a congested and difficult market at this time raised more concerns concerning Aurora’s technique and capability to money a new market while it tries to manage a turn-around in its core operation in Canada.
( All amounts in USD)
Entering U.S. CBD Market
After the marketplace closed on Wednesday, Aurora revealed that it will acquire Reliva which is a U.S. CBD company. The offer is priced at $40 million in shares at closing and an earn-out of up to $45 million over two years. Aurora shares shot up over 30%on the news which appears excessive given the minimal effect this offer will have on the business as talked about listed below.
The U.S. CBD market has actually existed for many years and has actually been disrupted given that 2018 after the 2018 Farm Bill passed to legislate commercial hemp growing. Many investors anticipate the CBD market to experience significant development for the years to come. However, there is a catch that has affected market incumbents. Because the 2018 Farm Bill was passed, a great deal of vendors went into the CBD market assisted by the low barriers to entry and flourishing customer demand for CBD-infused products. Inexpensive hemp crops are also readily available from farmers around the country. Since then, we have seen CBD business dealing with wearing down market share and degrading monetary efficiency despite the general market growth.
( Source: Bloomberg)
The leading public business in CBD is Charlotte’s Web ( OTCQX: CWBHF) and its recent underperformance functions as a good proxy for the total market difficulties. Considering That Q4 2018, sales have not grown at CWEB and gross earnings stayed flat all while the entire CBD market experienced considerable development. After the legalization, national F/D/M partners went into the arena and CWEB took pleasure in significant growth from these channel partners. The rising competition suffocated its standard retail outlets including lots of health and wellness stores and independent retailers. Despite investing heavily in infrastructure and sales and marketing, CWEB has dealt with major headwinds in trying to grow its service in the congested CBD market.
( CWEB financials
With minimal growth chances within the CBD industry, we see this deal doing little to assist Aurora’s development profile. The decision to enter the U.S. CBD market is also debatable as the market is presently reeling from oversupply and low barriers to entry. Overall, this is a deal that is not going to significantly alter the development profile or financial performance of Aurora offered the existing market conditions which implies that any excessive share rate movement is likely an overreaction and could be reversed in the near-term.
I have no company relationship with any business whose stock is pointed out in this short article.