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Will Aurora Cannabis (ACB) Have to Give Up Control to Reverse Its Fortunes?

One of the things that has attracted me to Aurora Cannabis (ACB) for some time has been its decision to forego giving up control of the company as Canopy Growth (CGC) has done, which eventually resulted in Constellation Brands taking control of Canopy, while changing its business model.

With Aurora under pressure because of the problems associated with the Canadian cannabis market, especially the snails pace of awarding licensing and opening retail outlets, resulting in too much supply because Aurora and others had based production capacity built-out, to a major degree, on hundreds more stores being opened by now.

In this article we'll look at whether or not Aurora should, or will be forced to, give up control of the company in order to support long-term operations and growth, or even if it will be able to attract a suitor now that the Canadian cannabis market has temporarily collapsed.

Understanding the Canadian problem

It's obvious as to the basic failure of the Canadian governments in regard to the licensing process and the serious lack of retail cannabis stores to sell product in. What isn't understood as much are the various elements of the business and market and how they've been impacted by this.

For example, the black market continues to flourish and defend its lower prices because in the major Ontario and Quebec markets they have almost no competition from the legal cannabis market. Because companies have limitations associated with the inability to scale because of so few stores, they can't compete on price with illegal producers and sellers.

Another factor is it limits the potential to attract many new customers that may want to give cannabis a try for the first time. It also undermines the potential of derivatives because of the lack of retail outlets.

Can or will Aurora seek out an investment partner

Watching the terrible impact of Canopy Growth's under performance on the earnings of Constellation Brands, it's going to be difficult for Aurora to attract a large suitor if that's what it decides to do.

On the other hand, the plummet in the valuation of the company makes it much less expensive to take a significant position in, if a company wants to enter the cannabis sector with one of the largest producers in the world as its partner.

I think a major problem here is that those that have been impressed with Aurora, have been so because of its independence and willingness to take risks. If it changes direction and gets a cash infusion in exchange for basically losing control of the company, it will no longer be as attractive over the long haul, once the cannabis market reverses direction.

At the same time, it will need more capital going forward, so it will have to decide what direction it wants to take to cover its expenses as it and the cannabis market go through growing pains.

As mentioned earlier, the company isn't near as attractive as it was about a year ago, and it's questionable whether or not it can attract a company that wants to invest in it.

For that reason, making a deal with a distribution partner or partners may be a better route to take as long as it can raise additional capital.

Conclusion

Personally, I think Aurora Cannabis can continue to go it alone if it chooses to, although it will require it to find ways to improve its balance sheet.

The other challenge is the lack of progress in Canada has created an issue concerning what I call demand discovery, by which I mean there is no way of knowing the size of the legal cannabis market demand in Canada until hundreds of more cannabis stores and dispensaries are operational; that makes it hard to plan for future production capacity management.

As with all the cannabis producers located in Canada, Aurora Cannabis has an important piece of the business puzzle outside of its control, and based upon past performance of the various Canadian governments, this isn't inspirational for near-term prospects for the company.

Aurora still has among the best cost per gram and has been able to be among the top five recreational sellers in Canada based upon price. It also has a strong presence in international markets that it has just started to tap the potential growth in.

The key will be securing more operating capital in order for the market to work out the challenges the company now faces. If it manages to do that, it's still my favorite for long-term performance in the sector.

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