After Aurora Cannabis (NYSE:ACB) sold its remaining 10.5% stake in cannabis supplier Green Organic Dutchman Holdings (OTCMKTS:TGODF) ACB stock was up, but only for a short while. Given time to think about it, traders ultimately decided Aurora Cannabis stock wouldn’t be worth any more without than with it.
They may be right.
Granted, the sale nets Aurora a hefty $86.5 million in cash. That may be a modest figure compared to its market cap of $5.7 billion, but will prove a meaningful boost to however much of the unrestricted cash hoard of $346.7 million was left on the books as of the end of March.
It also buys Aurora Cannabis $86.5 million worth of time to figure out how to turn revenue into more profits. It and rivals like Aphria (NYSE:APHA) and Tilray (NASDAQ:TLRY) have been reporting negative cash flow of late, hinting at a looming cash crunch that could up-end these organizations before they work their way out of the red.
The decision to scale out of the rest of Green Organic Dutchman, though, may ultimately be a subtle hint that all the aggressive cannabis dealmaking of the past several months isn’t panning out.
A Bad Buy and ACB Stock
Most Aurora Cannabis stock owners may not even realize it, but the company was a key supporter of Green Organic Dutchman Holdings even before Green Organic Dutchman Holdings went public.
Aurora purchased roughly 33 million shares of TGOD in January of last year, and added 6.3 million IPO shares in May of last year, paying $3.65 each.
The funding also granted Aurora the option of buying nearly 17 million more shares in the future, at $3.00 apiece.
The investment wasn’t really about speculating on another young player in the cannabis business though. Aurora Cannabis was willing to hand over tens of millions of dollars of its own in order to secure the rights to purchase 20% of Green Organic Dutchman’s cannabis production.
That’s where things went south.
Green Organic Dutchman Holdings has struggled to produce at the levels it was suggesting it would be able to yield a year ago. For example, the completion of its Hamilton and Valleyfield facilities was pushed back from the final quarter of last year to the middle of this year, though that’s not the only way the company has come up short.
It was the worst possible time to not deliver, as retailers jockey for market share.
In the meantime, Aurora Cannabis sought out and found alternatives. CEO Terry Booth wasn’t afraid to explain exactly how and why either, commenting in Wednesday’s news release:
“When we acquired Whistler Medical Marijuana Corporation – an iconic and premium organic cannabis producer – our interest in TGOD became less important to our core strategy. Our return on our TGOD investment is significant and will add non-dilutive capital and further enhance our strategy to remain a dominant force in the global cannabis industry.”
Lauding one partner over the other and saying the words “our interest in TGOD became less important to our core strategy” cuts straight to the heart of the matter, stopping just short of saying something along the lines of “Green Organic Dutchman wasn’t getting the job done.”
ACB Stock Price Is Vulnerable
Aurora Cannabis was fortunate it was able to record a gain on its partnership-driven investment in TGOD. Rival cannabis names haven’t been as lucky.
Case in point: TILT Holdings (OTCMKTS:SVVTF) reported an impairment charge of half a billion dollars in May, stemming from a lackluster return on an investment it made in an effort to grow and create some synergy. Aphria has also been forced to write down $50 million worth of soured acquisitions.
Aurora Cannabis is hardly immune to the prospect though, leaving the ACB stock price vulnerable to even more weakness if-and-when shareholders are forced to digest such headlines.
Indeed, in July, Bloomberg’s Kenneth Shea pegged ACB stock as one of the names most vulnerable to writedowns along with Aphria and Canopy Growth (NYSE:CGC).
All told, those three companies (and Tilray and Cronos Group (NASDAQ:CRON) as well) are collectively sitting on $4 billion worth of goodwill related to spending on previous acquisitions. If those don’t start to bear fruit soon, these players will be forced to book writedowns on their respective goodwill tallies.
Its Green Organic Dutchman Holdings isn’t part of $3.2 billion worth of goodwill on Aurora’s books. But, the decision to cull its stake and supplant the partnership with another supplier is still telling in and of itself. It says not every partnership is paying off as anticipated.
Looking Ahead for ACB Stock
It’s dangerous to draw sweeping conclusions just from one single event, but you have to wonder about ACB stock here.
On the flip side, it’s naive to ignore a possibility when it jibes with other related developments. Aurora has clearly rethought Green Organic Dutchman, but it’s also rethought its Australis Capital subsidiary. Both were businesses the company wanted to be in not too long ago.
Meanwhile, Terra Tech (OTCMKTS:TRTC) has shed its Reno dispensary, and hedge funds couldn’t cut loose of key cannabis stocks fast enough during the second quarter, before things turned really ugly.
In short, cannabis players are changing their minds about a great number of things, after being in the business for a while.
To that end, it would be short-sighted to think the two aforementioned ventures are the only two that have fallen short of Aurora’s expectations. They’re just packaged differently than others.
Whatever is in the cards, a good deal of it should come to light after the closing bell rings on Wednesday, Sept. 11. That’s when the company will reveal its fiscal Q4 numbers, followed by an earnings conference call the following morning.
As was the case with other cannabis names, current and prospective Aurora Cannabis stockholders will be looking to see if the quarter ending in June will be the beginning of a writedown spree.
Shedding its stake in Green Organic Dutchman ups the odds it will be.
As of this writing, James Brumley held no position in any of the aforementioned securities. You can learn more about James at his site, jamesbrumley.com, or follow him on Twitter, at @jbrumley.
