A not-so-hostile takeover

Ken O’Sullivan is, by most measures, a loyal shareholder. He’d been a keen observer of Saskatchewan-based medical marijuana producer CanniMed Therapeutics since 2013, when the company morphed from the marketing arm of biotech company Prairie Plant Systems, to become the first licensed producer that delivered medical cannabis to Canadians.

When CanniMed announced it was going public at the end of 2016, O’Sullivan was quick to buy in. He presently owns 8800 shares in CanniMed, worth almost $245,000 based on Monday’s stock price.

But O’Sullivan’s faith is CanniMed has been dwindling over the past few months.

“I’ve been a shareholder in this company since Day 1. Shareholders are like athletes and I want to play for the best team — right now, that’s not CanniMed,” O’Sullivan told VICE Money over the phone from his native Regina.

In mid-November, CanniMed was presented with a rather tantalizing offer, at least from a purely monetary perspective — Vancouver-based Aurora Cannabis, one of the country’s biggest pot producers made a bid to acquire the company at $24 per share, almost $10 higher than its value at the time.

The bid was unsolicited, and soon, flat out rejected by CanniMed’s senior executives. The company pushed back, filing complaints with the Consumer Affairs Authority of Saskatchewan and the Ontario Securities Commission, alleging that Aurora’s interest in CanniMed was simply to “entice shareholders with a phantom value” for their CanniMed shares, based on an “inflated share price.” Those complaints were recently rejected by both regulators, leaving the takeover bid completely in the hands of CanniMed shareholders.

Meanwhile, just in the last 10 days, Aurora has made two major purchases of common shares in CanniMed on the open market, increasing its stake in the company to about 2.7 percent, and putting to rest any whispers that it would back out of the acrimonious takeover battle.

“We are getting overwhelmingly positive feedback from our shareholders,” said Cam Battley, Aurora’s Executive Vice-President. “In fact, we were kind of marvelling the other day with our proxy advisors at how we haven’t heard a single discouraging word. People are excited,” Battley told VICE Money.

Battley’s confidence is shared by CanniMed CEO Brett Zettl, but for obviously different reasons.

“We feel that we are very prepared for our shareholder meeting on January 23rd,” Zettl told VICE Money. “I’m very confident… actually I’ll say I have little doubt, that this is going to end well for me. Shareholders are going to see that this is by far the best direction the company has taken in a while.”

By that, Zettl means CanniMed’s recent bid to purchase another pot producer, The Tragically Hip-backed Newstrike Resources Ltd., a deal that was announced just days after Aurora’s bid for CanniMed. For a company that had a headstart in the cannabis space — it was the first producer licensed to sell medical marijuana in Canada — the bid to acquire a recreational pot company that only recently obtained its license to grow, is somewhat overdue.

“Brent was a pioneer in this game. He should be at the forefront of it, not trailing behind like CanniMed is now,” says O’Sullivan. “There’s a different group of boys in the space now, major business heads are involved. He’s an intelligent guy when it comes to the product, but this is a fast-paced business and we need aggressive leadership.”

O’Sullivan says that he (and he believes many other shareholders), will vote in favour of Aurora’s acquisition of CanniMed at the company’s shareholder meeting later this month. If the vote goes in Aurora’s favour, the takeover, worth almost $600 million, would be the largest in Canada’s nascent marijuana market, potentially propelling Aurora to the top of the cannabis charts in terms of market capitalization.

Since the takeover battle began, both CanniMed and Aurora stocks have soared — the former by 40 percent, and the latter by a whopping 120 percent.

“It makes sense for Aurora, they have the capital, they are a consolidator, and Aurora obviously wants to own a top-tier medical company which CanniMed is,” said Everett Knight, of Matco Financial, a private investment firm that holds positions in both Aurora and CanniMed.

But there’s been growing concern that the Canadian cannabis sector is morphing into an oligopoly of sorts, controlled by three major licensed producers — Aurora, Canopy Growth, and Leamington-based Aphria Inc. These three companies alone are currently valued at more than $17 billion, in a recreational market that is poised to be worth almost $23 billion once weed becomes legal in Canada this summer.

“For Aurora, it’s simple. They want to be bigger than Canopy Growth, and CanniMed is pure medical play,” said Paul Rosen, a major cannabis investor, with stakes in both CanniMed and Aurora.

“When CanniMed shot up over 60 percent after the deal was announced, I took advantage of that as an opportunity to sell out most of my CanniMed position. I held on to Aurora, as sort of a hedge strategy given the uncertainty around closing,” Rosen told VICE Money. He too, believes that CanniMed shareholders will “mostly” support the takeover bid.

Lisa Lavette (not her real name), also a Regina-based shareholder in CanniMed, shares O’Sullivan’s concerns about the company’s leadership. “I feel like I should be loyal to CanniMed, you know? This is our province’s marijuana company. But the other companies seem to be growing rapidly, their stocks are soaring, and I just feel like CanniMed got a little left behind.”

Zettl calls Aurora’s plan for CanniMed a “house of cards valuation”, and says that his shareholders are being duped by Aurora’s aggressive marketing tactics. “There are all kinds of things going on [at Aurora]. Their own directors sold 17 million shares, why are they trying to cash out of their own company?”

But for O’Sullivan, things should not have gotten this messy to begin with.

“It should have been a comfortable merger,’ he says. “Zettl is making the Aurora guys out to be school bullies, when this takeover should be a common sense move, and should have been mutual.”

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