Aurora Cannabis buys CanniMed in Canada's biggest deal

Two of Canada's major marijuana producers have agreed to the biggest deal in the country's booming pot sector after months of negotiations that started with a hostile takeover bid.

Cremona, Alta.-based Aurora Cannabis willbuy rival Saskatoon-based producer CanniMedTherapeutics Inc. for $1.1 billion in what the two companies are describing asa "friendly" deal.

"We are very pleased to have come to terms with CanniMed on this powerful strategic combination that will establish a best-in-class cannabis company with operations acrossCanadaand around the world," saidTerry Booth, chief executive officer of Aurora.

The deal comes months after Auroramade its first attempt to takeover CanniMedin mid-November with a bid that valued the company'sshares for up to $24.

CanniMedargued that the offer was too low, considering the volatile jump in stock market valuations for marijuana producers in recent months.

The companies starteda public row with executives from both sides exchangingharsh words.

Earlier this month,CanniMedeven filed a lawsuit againstAurora, claiming it had conspired to injure the company's economic interests.

On Wednesday, the companies said the new deal would amount to about $43 per share based on an implied Aurora share price of $12.65 and a 3.40 exchange ratio.

Thefinal value of the deal, however, could fluctuate before it closes due tothe volatility of marijuana stocks.

CanniMedshares closed up nearly 12per cent on the Toronto Stock Exchange Wednesday on news of the takeover.

More deals ahead

The deal is the biggest of its kind in the Canadianindustry since Canopy Growth,the country's largest marijuana producer, bought MettriumHealth for $430 million in 2016.

With the CanniMed acquisition, Aurora will become one of the country'sbiggest marijuana producersby market capitalization.

Russell Stanley, analyst at Echelon Wealth Partners, said the sector will definitely see more consolidation this year as Canadalegalizes the recreational use of marijuana.

Canada is set to become the first G7 country to allow recreational use of marijuana by the summer.

"I do expect more transactions to follow. I think it's a question of when and not if, and who the dance partners will be," Stanleysaid.

"The largest cannabis companies in the space trade at higher multiples than the smaller names, and that means they have strong acquisition currency to use for transactionslike this," he added.

The deal means CanniMed will have to abandonplans to buy Newstrike Resources, which will cost the producer a $9.5 million break free as Newstrikeshareholders had already agreed to the takeover.

Boosting capacity

Looking ahead, Stanley said we could see more mergers and acquisitions in the sector that would not just be about "buying scale."

"We could transactions that could give companies better geographic exposure or strength on different product development," he said. "I don't think they'll all just be about size."

VahanAjamian, an analyst at Beacon Securities, agreed with that sentiment, saying it was too late now for marijuana producers to grow their businesses organically in time tomeet the demand from this summer.

"One way to get faster access to capacity is to make more acquisitions," he said.

"We'll probably see a lot more marriages wherewhat province you're in matters and what types of products you can offer matters, in addition to getting more brute quantity of what you can sell."