CanniMed Therapeutics (CMED) – Merger Arbitrage – 14% upside

Current Price – $20.98

Buyout Price –  $24

Upside – 14%

Expiration Date – TBD (currently unsolicited offer only)

Press release

This idea was offered by Vladimir.

 

Aurora (TSE:ACB) made a hostile offer for CanniMed (TSE:CMED) directly to shareholders (yet to be placed) that is subject to several conditions, including tendering 66.6% of shareholders. Currently 3 largest shareholders agreed with proposal (38%), which increases the likelihood of transaction going through. 

Currently share trades at 14% discount to buy out price.

The situation is complicated by the fact that BoD is not supportive of the transaction and CMED in parallel participates in alternative transaction where CMED made an offer for HIP, alredy binding with C$ 9.5m break-up fee ($0.24 per share). It is a complication obviously, but I don’t believe that CMED shareholders will shoot in their own leg and buy HIP, therefore blocking CMED-ACB transaction. Not with support of 3 largest shareholders.

The offer price (stock for stock) is strangely worded, but likely that means the offer is capped at C$24:

“Pursuant to the Proposal, CanniMed shareholders will be entitled to receive a maximum of $24 per CanniMed share or 4.52586207 Aurora shares, based on the 20-day volume weighted average price of Aurora. Based on the closing price of Aurora shares on November 14, 2017, this translates to 3.74415 Aurora shares for each CanniMed share.”

CMED formed special committee of independent directors to review the Aurora offer. Also company warned shareholders on volatility of Aurora share price (which continues to climb up):

CanniMed cautions that the share consideration (or equivalent share value) offered by Aurora in its press release is inflated and CanniMed believes over values Aurora in that it is based on the closing price of the Aurora shares on the TSX on November 14, 2017, which reflects an increase of 124.9% over Aurora’s closing price on the TSX over the preceding 12 trading days (Aurora’s closing share price on October 27th, before the recent run-up, was $2.85 which implies a value of $12.90 per CanniMed share at the Exchange Ratio. CanniMed’s closing price on October 27th was $11.53).”

Recent results show Aurora’s Q1 FY2018 revenues of C$8m compared to market cap of C$2.8bn – clearly a concern of potential overvaluation and inflated share price.

Interestingly, one of the CMED independent directors (on board since 2001 and owner of 2.5m shares) resigned after Aurora offer was announced (this might be unrelated).

3 COMMENTS

  1. Jesse

    Aurora seems like an interesting short if you can get comfortable with the volatility. As CanniMed points out, the Aurora shares have really run up in value. $4.4B market cap on $23M of LTM revenue…

  2. Jesse

    Wow: “The agreement to create the world’s top marijuana producer by market value follows months of tensions between the companies. Aurora had originally made a hostile bid capped at C$24 per share for CanniMed, and increased it to C$43 in the new offer.”

    I didn’t play this one, but hopefully some people did.

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