Part of cannabis and investments
The investment banks struggle to find buyers for Aurora Cannabis Inc.'s participation in The Green Organic Dutchman Ltd., with about 40% of the deal unsold, according to people familiar with the transaction.
Late Tuesday, Aurora has signed an agreement to dump its remaining stake in TGOD through a group of investment banks led by BMO Nesbitt Burns. The $ 86.5 million deal is priced at $ 3 per share, a 14.5 percent discount to the Green Organic closing price of $ 3.51 on Tuesday.
Unlike most sales of Canadian shares, which are conducted through a purchased deal, BMO has structured the agreement as a trading bloc. Typically this format is used when there is a large demand from investors, so investment banks primarily serve as intermediaries that quickly match buyers with the seller.
However, many institutional buyers opposed Aurora's mail, leaving the underwriters hooked to any unsold stock, according to sources in the capital markets that had been granted anonymity because they were not allowed to speak publicly about the transaction. TGOD shares closed Thursday at $ 2.94, slightly below the purchase price of $ 3 per share paid to Aurora.
The lackluster question is one more proof that Canadian cannabis companies are entering a new era, in which investors are asking for profits compared to the potential for expansion. The ETF on the Horizons Marijuana Life Sciences Index, which follows the Solactive North American Marijuana Index, has fallen by 39% since cannabis recreational use was legalized in October. TGOD shares have fallen by 57% since the company's last loan was announced the same month.
"It is increasingly difficult for many companies to raise capital," said Michael Ruscetta, CEO of Trichome Financial Corp., which provides debt financing to cannabis companies.
He provided several possible reasons. "Cannabis stocks have had a poor performance, we have seen CannTrust, we have seen the losses of some of the biggest producers and people are making a kind of pause and saying:" I'm not sure these evaluations make sense , & # 39; ”Mr. Ruscetta said, referring to CannTrust Holdings Inc., a cannabis grower who is under investigation by Health Canada to grow cannabis in unlicensed rooms.
At the same time, many Bay Street hedge funds that helped fund the Canadian cannabis industry have lost interest in Canadian producers, said Aaron Salz, principal of financial consulting firm Stoic Advisory Inc.
A number of US institutional investors who were starting to invest money in Canadian cannabis agreements were also frightened by recent events, he said.
"Institutional investors who have generally purchased these equity contracts and private placements have mostly moved to the United States. It is evident that there has been some loss of confidence in the market [Canadian ] of the LP, with financial results issued by Canopy and all this happened with CannTrust, "said Salz, referring to Canopy Growth Corp.'s recent quarterly financial results, which were not up to analysts' expectations.
TGOD's participation is not the first victim of this trend. During the summer, Kelowna-based producer Flowr Corp. sought to raise $ 125 million, but had to cancel the agreement in late July, citing "prevailing market conditions". Flowr was able to raise funds in August, but only $ 43.5 million.
Aurora was one of TGOD's first supporters, investing $ 55 million in the Mississauga-based manufacturer in January 2018 and another $ 23 million in the company when it was released in May 2018.
The two companies, however, have been separating since September 2018, when Aurora's general manager, Cam Battley, resigned from the TGOD board of directors without any explanation from either company.
His departure from the board of directors is one of the reasons why Aurora shares could be sold through a trading block. This structure of agreements can be used as long as the seller does not have a "control block", which tends to mean selling less than 20% of the shares of a company and not having positions on the board of the company concerned.
Although signed block negotiations are rare in Canada, they have been used in some cases. This structure costs less to the seller. The commission paid to investment banks for a purchased deal is usually around 4%. For selling the Aurora share, they earn 2%.