Week 27

Update for Cannabis Industry between July 17th and August 11th.\

DISCLAIMER: This is not financial advice or a recommendation to buy, sell, or short any security. This is my personal opinion and analysis for informational and educational purposes only. I may be wrong and I am not a financial professional. Event-driven/speculative investments can result in substantial losses, including the loss of most or all of your investment. Do your own research and consider speaking with a qualified financial professional before making any investment decision.

Curaleaf Announces Intention to Launch Take-Over Bid for Aurora Cannabis.

Let's see if we can do an event-driven/speculative tender-offer trade.

Let's assume that ACB (Aurora Cannabis) currently trades at 3.47$ and CURLF (Curaleaf) trades at 9.65$.

First, the math:

At CURLF = $9.65:

0.3463×9.65+0.75=$4.0918

So the market is offering you ACB at $3.47 for an implied value of $4.09 or: 17.9% gross spread.
Pretty good right?

The risk with this trade is that Curaleaf explicitly says it has not commenced the offer and there is no assurance it will ultimately make it. It also says Aurora has already refused to engage with Curaleaf on multiple occasions. So today's situation is effectively:

CURA wants ACB → ACB board doesn't want to engage → CURA is going public directly to shareholders.

The most important part is that it makes the probability (which is very important) of sucess much less certain than a normal signed merger agreement.

So a tempting trade would most likely be:
Buy ACB + short 0.3463 CURLF

Mathematically that hedges the exchange ratio beautifully if the tender actually happens.

If Curaleaf walks away before making the offer, you've potentially got:

• ACB falling sharply
• CURLF potentially rising
• and therefore both legs can lose simultaneously.

That's the opposite of what you want basically.

So I would not call long ACB/short CURLF a true arbitrage at this stage.

Also, after reading the announcement or the tender offer, they explicitly say that Curaleaf may decide not to make an offer if:

• it finds material adverse information
• Aurora adopts defensive tactics
• Aurora undertakes significant transactions
• or the parties negotiate a different transaction structure

Essentially: "No formal take-over bid has been commenced"

But here's why I think the trade is interesting

The 4$ headline is not necessarily the real economic ceiling.
The base consideration is: 0.3463CURLF+0.75$ WITH a maximum consideration of 5$.

So if CURLF stays around 9.65$, you're looking at 4.09$.

• If CURLF goes to 11$: 0.3463(11)+0.75=4.56​$
• If CURLF goes to 12$: 0.3463(12)+0.75=$4.904​
• At approximately: 12.27$ you hit the 5$ cap

So basically we have 4 outcomes right now:

• Curaleaf walks away / offer dies
• Curaleaf formally launches but Aurora defeats it
• Offer succeeds at current CURLF price
• Offer succeeds + CURLF rallies

Another possibility could happen: Another bidder appears.

A public unsolicited offer puts Aurora's board under pressure.
If Aurora says: "No, we're worth more than 4$"
Then shareholders can reasonably ask: "Okay, show us."

Let's also talk about "The $2.75 number"

$2.75 was the 30-day VWAP.

So, it doesn't necessarily mean ACB goes back to $2.75 if the offer fails. Because the offer itself has changed the information set. Before today, investors didn't know that Curaleaf was willing to pay 4$-ish for ACB. Now they do.

Here's the calculation I think matters most (AI helped me a bit here (sorry for AI haters)).

Suppose we assume:

• Success value = 4.092$
• Failure value = 2.50$

At 3.47$, the implied probability of success is:

3.47=p(4.092)+(1−p)(2.50) 

Therefore: p = 61%

If failure value is $2.25: p = 52.6%
If failure value is $2.75: p = 53.7%

If failure value is $3.00: p = 66.5%

So now the question remains: What is ACB actually worth if Curaleaf doesn't acquire it?

Imagine we think: 60% probability deal eventually succeeds at 4.09$ and 40% if deal fails and ACB is worth 2.50$.

Expected value would be: 0.60(4.092)+0.40(2.50) = 3.455​$

Which is basically today's price.

So 60/40 isn't particularly attractive if the failure value is 2.5$.

But: 70% success / 30% failure at 2.50$

Puts our expected return at: 0.70(4.092)+0.30(2.50)=3.615$
which is 3.615/3.47-1 = 4.2%

and at 80% success / 20% failure it gets us to 8.8%

So should anyone make a trade? Ehhh listen the 105-day period matters enormously

The formal offer, if launched, will be open for 105 days, subject to extensions/acceleration/withdrawal under its terms.

So even the 17.9% headline spread isn't necessarily a 17.9% annualized-free-money situation.
If it took roughly four months to resolve: (1.179)365/120−1 = 66%

And because it is not a 100% probability trade, it is not fantastic. And if there's a 40% probability of losing 25 to 35%, the expected return changes dramatically.

I think overall, doing a long on ACB could be interesting as you get:

• 4.09$ implied consideration
• potential $5 cap
• potential improvement in terms
• potential competing-bid optionality
• exposure to a possible hostile-takeover process
• And you're not taking the bizarre risk of shorting the potential acquirer before the offer even formally exists.

Also keep in mind that Curaleaf has apparently spent about 7 weeks pursuing this privately before going public. That makes me less inclined to assume the $4 offer simply disappears.

On the other hand, Aurora's refusal to engage is a very significant warning sign. It suggests Aurora's board may believe either:

• 4$ is inadequate;
• Aurora has a better standalone future;
• Aurora has another strategic option;
• management doesn't want to sell;
• or they intend to force Curaleaf to increase the price (which i doubt).

And that last possibility is exactly why ACB at 3.47$ isn't necessarily a bad place to be even if the 4$ offer doesn't immediately succeed.