Is Curaleaf Stock a Buy With Its Attempted Hostile Takeover of Aurora Cannabis Under Way?

A new chapter in the big takeover saga in the marijuana industry began on Aug. 18. U.S. multistate operator Curaleaf Holdings (OTC: CURLF), which is vying to become the new owner of Canada's Aurora Cannabis (NASDAQ: ACB), formally launched a hostile bid for its peer. This came almost exactly a week after Curaleaf first publicly announced its intentions.

Owning Aurora would transform the U.S. cannabis company, changing its business profile and pushing it into new markets. That is, of course, if the attempt succeeds. But that's a story for the future; here's my take on whether Curaleaf is a buy right now.

Image source: Getty Images.

Taking it to the shareholders

That morning, before the market opened, Curaleaf formally commenced its acquisition effort with a tender offering filed with the U.S. Securities and Exchange Commission.

As detailed in the announcement earlier in the month, it's offering $4 per Aurora share in a deal consisting mainly of its common stock with a smaller cash component. The bid is made up of almost 0.35 of a share of Curaleaf stock and $0.75 in cash per Aurora share.

The U.S. pot company continues to commit to a potential cap of $5 a share in total consideration should Aurora's stock price experience a "substantial" increase.

The would-be acquirer added that the $4 is 45% higher than the 30-day volume-weighted average price of Aurora's stock as of the day before the original announcement was made public. Should that cap be triggered, that premium would jump to almost 82%.

Curaleaf went hostile because of what it claimed was the lack of meaningful response from Aurora management. In a press release issued on the day of the original announcement, however, the Canadian company begged to differ. It said that its lead independent director, Michael Singer, communicated with Curaleaf Chief Executive Officer Boris Jordan as recently as July 24.

In that initial response, Aurora implied the hostile offer was inadequate. Yet it wrote that a special committee of its board of directors would be formed to evaluate it "with a view to determining the course of action that is in the best interests of the company and all stakeholders."

Aurora added that it did not intend to comment further on Curaleaf's bid until it deemed commentary appropriate. True to its word, as of early morning Wednesday, it had not published a response to Curaleaf's update.

Since a hostile takeover depends on the willingness of the target company's investors to sell their shares, Curaleaf addressed those folks in the update. It quoted Jordan as saying, "We believe this is a compelling opportunity for both companies and, most importantly, for shareholders."

Cure for the weed stock blues?

I think it's compelling because Aurora is Canada's leading purveyor of medical cannabis. Yes, that's a far smaller category -- both in that market and the U.S. -- than the recreational segment, and it's harder for a cannabis company to qualify as a purveyor of medical pot.

Yet these limits help make healthcare marijuana notably more profitable when compared with recreational cannabis.

What's more, Aurora is not only heavily involved in the segment (it currently accounts for almost 95% of the company's revenue) but is also actively shipping such wares abroad. Aurora's product reaches countries that have legalized medical pot -- like Germany, where it also owns and operates a licensed marijuana growing facility.

Less than 50% of Curaleaf's cannabis sales consist of medical weed, so the category would be a critical part of the combined company's operations.

I wasn't excited about either stock after Curaleaf's original public announcement, and I'm not encouraged by the U.S. company's update.

Combining the two businesses wouldn't be quick or easy. Right off the bat, there is a fundamental regulatory mismatch between Canada, which has fully legalized pot and various derivative products, and the U.S., where the drug remains largely illegal at the federal level (although medical weed was recently rescheduled subjecting it to less onerous regulations).

On top of that, the international distribution networks are complicated, and are likely tough to consolidate. Time, effort, and resources would be needed to do this effectively. Meanwhile, despite certain advantages, neither company has proved it can be reliably and routinely profitable, and there's little indication this proposed deal will magically change once they combine.

A haze of lukewarm smoke

Investors haven't been falling over themselves to buy Aurora stock in anticipation of the potential marriage.

There was an initial pop after Curaleaf's original announcement, but the shares have since settled lower. They now trade at $3.67 apiece, with the discount to the proposed offer of $4 a share implying skepticism that the acquisition will go through and/or that it would create a powerhouse company if it is completed.

Adding this all up, I'd give Curaleaf stock a pass these days. I'm not seeing a great deal of potential here.

Eric Volkman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.