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Why Aurora's Deal With Nelson Peltz Is a Mixed Blessing

Dan Caplinger, The Motley Fool

Marijuana stocks have soared to start 2019, and cannabis investors are looking at the biggest companies in the budding space as having huge potential for further growth. Aurora Cannabis (NYSE: ACB) is one of the best-known companies in the business, with unrivaled efforts to build out industry-leading growing capacity.

Yet unlike rivals like Canopy Growth and Cronos Group, Aurora hasn't yet made a major partnership with an established mature company in the consumer goods space. That looks like it might be ready to change, with Aurora announcing that hedge fund billionaire Nelson Peltz of Trian Fund Management will become the company's strategic advisor. But even though shareholders immediately celebrated the news by pushing Aurora shares up more than 10% in premarket trading following the announcement, Peltz's advice will come at a cost -- and it's unclear whether the move will benefit shareholders in the long run.

Green aurora borealis in sky over a mountain ridge, with Aurora logo and text superimposed.

Image source: Aurora Cannabis.

Peltz's reputation as an activist investor

Nelson Peltz's history as an activist investor explains why Aurora investors are excited about the move. The billionaire hasn't shied away from high-profile efforts, including most recently his joining the board of directors of Procter & Gamble (NYSE: PG) in an attempt to shake up the slow-growth consumer goods behemoth. His influence has also had an impact at companies ranging from Mondelez and PepsiCo in the snack and beverage space to chemical company DuPont, now part of DowDuPont.

Peltz has extensive experience in the food business, and that has direct implications for Aurora. Many cannabis producers are looking closely at derivative products like edibles and cannabis-infused beverages, and Peltz's familiarity with the work involved in setting up the internal assets and logistics necessary to be successful in that area should be helpful in Aurora's expansion.

What Aurora wants from Peltz

In its news release announcing the move, Aurora explained that it expects Peltz to "work collaboratively and strategically to explore potential partnerships that would be the optimal strategic fit for successful entry into each of Aurora's contemplated market segments." The cannabis company also said that Peltz would help Aurora with its global expansion strategy.

Aurora CEO Terry Booth expanded his company's expectations. "Nelson is a globally recognized business visionary," Booth said, "with a strong track record of constructive engagement to generate accelerated, profitable growth and shareholder value across many industry verticals that are of great interest to us." Booth also likes Peltz's long-term vision and sees value in his counsel to help Aurora make maximal impact in the markets it wants to lead.

Peltz's ideas align with Booth's. As the hedge fund maven explained, "I believe Aurora has a solid execution track record, is strongly differentiated from its peers, has achieved integration throughout the value chain, and is poised to go to the next level across a range of industry verticals." The billionaire specifically pointed to "potential engagement with mature players in consumer and other market segments" as part of his future work.

What Aurora will pay Peltz

Of course, bringing Peltz on board won't be inexpensive. Aurora agreed to grant Peltz options to purchase about 19.96 million shares at a price of 10.34 Canadian dollars per share, which is in the general range of where the stock was trading in the week prior to the announcement. The options will vest on a quarterly basis over the next four years regardless of the outcome of Peltz's work. However, portions of the option grant will be eligible for accelerated vesting upon the stock tripling and quadrupling in price, as well as upon certain transactions defined in a formal agreement that Aurora didn't include in its press release.

Given Aurora's history of dilution through using its stock in strategic transactions, it's not surprising to see the marijuana company use its equity once again in its deal with Peltz. The 20 million shares covered by the options would equate to roughly 2% of Aurora's outstanding share count. In practical terms, if Aurora sees its stock price hit the CA$41.36-per-share mark, Peltz's profit would amount to roughly CA$620 million. That money will effectively come from the gains that existing shareholders might have kept for themselves -- although in that event, many would argue that without Peltz's involvement, such share-price gains might never happen.

Like most activist hedge fund leaders, Peltz has had a mixed track record with some high-profile wins and other losses. Aurora shareholders have high hopes for the billionaire's strategic advice, but that doesn't make it a sure thing that they'll reap the rewards.

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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool is short shares of Procter & Gamble. The Motley Fool has a disclosure policy.