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Cannabis stocks are off to a good start for 2019, and Aurora Cannabis Inc. (NYSE:ACB) hasn’t missed a beat. On Monday, CEO Terry Booth announced ACB had entered into a letter of intent to acquire Whistler Medical Marijuana Corp. It appears that about every living soul was gushing about the deal.

Whistler has been called one of the “blessed eight,” the crown jewel of organic cannabis production worldwide. Not to get lost in the hyperbole, Aurora was dubbed the Berkshire Hathaway of cannabis. Wow, that is pretty impressive language and hopefully well earned.

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With more than $7 billion in market value, Aurora is on an acquisition tear and has the firepower that goes with it. On any given day the company ranks with the largest companies (measured by market value) in the cannabis industry. Their goal is to have 500,000 kilos of production in the foreseeable future. Only about 150,000 kg of annualized production is now available, so acquisitions make loads of sense.

In the last year, close to $550 million has been consumed in Aurora’s buying spree. That is a load of capital especially considering this all took place before the legalization of cannabis in Canada on October 17. Before that time, there was no way to finance through conventional means like banks.

Much to their credit, Aurora was able to come up with lenders for almost $350 million and used another $215 million in ACB stock to cover the rest of acquisition costs. To open a pathway to find capital in the future, Aurora’s application for listing on the New York Stock Exchange became effective on October 18 last year.

Finding the money

Considering the restrictions on banking and challenges of the financial markets, you have to congratulate Aurora for their accomplishments. However, there are several drawbacks to this strategy that clearly separate Aurora from Berkshire Hathaway.

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This first is overpaying for acquisitions. How can this possibly be accurate given the explosive long term potential for cannabis? Consider this: over the past year nearly $3 billion has been added to the balance sheet under the category of “Goodwill.” Another $617 million was added that is identified as “Intangibles.”

For those who could care less about accounting, goodwill and intangibles are terms used by CPA’s to measure when a company pays more for an acquisition than the value of the tangible assets it is receiving. One of the best and most common justifications for goodwill is the value of a brand name. For example, what would you pay for brands such as Leafs by Snoop, Marley Natural or even Willie’s Reserve? These are brand names that resonate worldwide with cannabis buyers.

Here is where Aurora is overpaying for Whistler

Aurora’s stock rose more than 6 percent (compared with the ETFMG at +1.7 percent) when the letter of intent was announced. So it is easy to conclude that investors are wholeheartedly behind the deal. But did Aurora overpay in order to make the deal happen? We aren’t condemning Terry Booth, but the evidence says yes indeed — with only one caveat.

Whistler Medical Marijuana Corp. is a private company, so there is not a lot of data available. The biggest question out there is what is Aurora gaining for their $132+ million that could not have been accomplished differently.

Let’s start by looking at production levels. Whistler is scheduled to open a second production facility in September at which time it will have 5,000 kilograms of annual capacity of the highest quality Certified Organic cannabis. That suggests Aurora is paying $26.4 per gram for Whistler production. As of the first quarter of 2019, Arora’s cash cost to produce per gram of dried cannabis sold was $1.45.

Why not contract to purchase all the production of Whistler and agree to finance their expanded production? Even if the price per gram were $9, this would be more cost-effective.

So what is Aurora gaining for what seems like an enormous premium?

To begin there is the value of Whistler being Certified Organic. Secondly is the brand name value and cache of Whistler. Then there are certain unknowns like the number and benefit of any patents Whistler holds. At the end of the first quarter of 2019, Aurora carried $67 million in active patents on their balance sheet and having the right technology is a no doubt a valuable asset. But could it be worth $100 million or even $50 million: very doubtful.

As for the value of the Whistler brand, it holds excellent value according to Rebecca Brown CEO of advertising firm Crowns Agency. As paraphrased in MarketWatch she said, “the words ‘organic’ and ‘Whistler’ are also a declarative, clear statement of the brand, — and Whistler, the British Columbia resort town, is associated with positive things and as a ‘place brand’ Canadians are very familiar with it.”

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With no disrespect to anyone, the transferability of the Whistler brand attributes and connection to cannabis outside of Canada are far more modest, thus far less valuable.

Just because Aurora is overpaying, at this point in its financial evolution one thing should be mentioned: they can afford to. After all, Whistler is being bought with Aurora equity that at $7.4 billion in public market value may be Terry Booth’s cheapest currency.

One thing can be stated with confidence. Neither Berkshire Hathaway or Warren Buffett would pay $132 million for 5,000 kilograms of even the best and purest Certified Organic cannabis.