Aurora Cannabis bought Medreleaf in a $2.3 billion stock deal — the largest cannabis merger ever.

It's a sign that M&A is heating up in the cannabis space.

The deals are driven by the excitement around legalization, competition for scale, and specific expertise on the medical side of the sector.

A dealmaking boom in the marijuana sector is ramping up as excitement around legalization grows.

Aurora Cannabis, one of the largest Canadian growers, bought its rival Medreleaf for a $2.3 billion stock deal, the companies announced in a joint statement on Monday. The combined firm will be the largest cannabis company by market cap, leapfrogging its chief rival, Canopy Growth.

The behemoth will produce a total of 1.25 million pounds of cannabis in its facilities and will have access to the increasingly important European market.

The deal is one of many to pop up in the cannabis sector in recent days.

"Merger Monday, a Wall Street adage, is back in vogue but in a new space, the cannabis sector," said Morgan Paxhia, Chief Investment Officer of cannabis industry-focused hedge fund Poseidon Asset Management.

With the ink barely drying on the Aurora-MedReleaf deal, a consortium of four cannabis companies — Baker Technologies, Sea Hunter, Brightside, and Sante Veritas Therapeutics — announced a merger on Tuesday, operating under the name TILT. The new conglomerate will list on the CSE, a Canadian exchange.

Here's a rundown of the other major Monday announcements:

Canopy Growth announced it would seek to list on the NYSE and begin trading shares at the end of May (pending approval), amid a wave of excitement about marijuana legalization sweeping the US . The company also announced it purchased the remaining third of Tweed, a British Columbia-based grower.

Green Thumb Industries, a Chicago-based cultivator, announced it's going public through a reverse-takeover agreement with the Toronto Stock Exchange-listed Bayswater Uranium Corporation. The new public company will list on the CSE.

IAnthus, a firm that operates cannabis cultivation facilities in a number of US states, announced it received a $50 million investment from cannabis-focused private equity firm Gotham Green Partners, in the largest-ever single public investment by one investor into a cannabis company.

"We expect to see transaction activity in M&A, IPOs, and private funding to continue hitting record levels as the velocity and size of capital is still relatively low but picking up meaningfully around the world," Paxhia said.

A worker collects cuttings from a marijuana plant at the Canopy Growth Corporation facility in Smiths Falls, Ontario. Thomson Reuters

The strategy behind cannabis deals

Cam Battley, Aurora's Chief Corporate Officer, told Business Insider that the merger is intended to help the company make inroads into new markets.



"We didn't actually go to do this in order to achieve scale," Battley said. "It was a byproduct of the strategic rationale."

Nonetheless, Battley said the merger gives Aurora everything it needs to "rapidly expand around the world."

"We're operating based on a very clear strategic plan that calls for both organic growth and growth by M&A and for all of that to happen incredibly quickly," said Battley.

Battley said the company is continuing to build out its 800,000 square-foot production facility near the Edmonton, Alberta airport, as well as a number of other state-of-the-art cultivation facilities in Canada and in Denmark.

Aurora has also been on an acquisition spree in recent months, completing eight acquisitions and eight partnerships in the last year alone.

"The whole sector moves fast, but we move at what we call the speed of Aurora," Battley said. "And no exaggeration, the entire management team works seven days a week."

This is all good news for shareholders. Each shareholder of MedReleaf will receive 3.575 shares of Aurora, equating to around 40% of the combined company.

"MedReleaf’s shareholders will be getting a healthy premium," Vahan Ajamian, an analyst at the Toronto-based Beacon Securities said in a note. "We believe this development will spark M&A enthusiasm across the sector."

An employee cuts cannabis buds in a laboratory at the headquarters of AGES agency in Vienna, Austria March 15, 2018. REUTERS/Leonhard Foeger

Why specific expertise makes for a good acquisition target

In the US, tech and pharma companies that have specific expertise in the cannabis sector make for the best acquisition targets.

Each of the 29 states with some form of regulated cannabis — whether medical or recreational — has its own regulations around the legal cannabis industry, creating what amounts to "29 unique markets," Alex Coleman, the new CEO of TILT, told Business Insider.

The Trump administration's stance toward cannabis is still unclear, though there are a number of legalization bills floating around Congress. Canada, on the other hand, is set to legalize cannabis federally this year and roll out recreational markets as early as September, pending deliberation in the Canadian Senate.

"I think you're going to be seeing more strategic acquisitions," Coleman said. "I think those acquisitions will mostly be smaller in-state acquisitions with companies that have proven themselves to have some point of difference."

These acquisition targets could be companies with specific geographic expertise, or more likely smaller startups geared toward the pharmaceutical side of the industry that have patented some sort of extraction method, Coleman said.

For example, if a startup came up with a treatment that could address a medical condition using certain combinations of CBD and THC (two of the most well-known active chemical compounds in cannabis) that would make the company a prime acquisition target, Coleman said.

From Canada to the world

Though there's lots of activity on the pharma and tech side in the US, it's the big Canadian companies that are poised to get a first-mover advantage to the global medical cannabis export market, Karan Wadhera, the managing partner of Casa Verde Capital, told Business Insider.

"While in the US we are still dealing with a myriad of issues related to our fragmented market — Canada is already seeing multi-billion dollar M&A activity," Wadhera said.

Battley, Aurora's CCO, echoed Wadhera's sentiment.

"There's a very unusual situation that exists today whereby a handful of Canadian companies have an opportunity to establish and invents the global cannabis industry," Battley said.

Canada's cannabis industry is the most mature, and Canadian companies can access capital much easier than US companies, where investors are largely reticent to jump into the industry because of the federal government's stance.

While Aurora would have "done fine" in launching consumer brands in Canada following legalization, the big economic opportunity lies in the global medical market, Battley said.

As new medical markets open up around the world, Canadian companies like Aurora will have the supply and infrastructure to export cannabis to countries in the European Union — as well as Australia, Israel, and others — as those markets open up.

Battley said Aurora doesn't have any real US competitors because cannabis remains federally illegal, so US cultivators can't deduct business expenses (lest they get in trouble with the IRS), can't sell product across state lines (because of the Interstate Commerce Act), and largely can't access public exchanges.

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