Curaleaf Holdings (TSX: CURA; OTCQX: CURLF) is asking Aurora Cannabis (Nasdaq and TSX: ACB) shareholders to accept an offer it values at US$4 per share. That figure is straightforward enough for a headline. It is not, however, a fixed cash price.
Under the unsolicited bid Curaleaf formally launched August 18, Aurora shareholders would receive 0.3463 of a Curaleaf subordinate voting share plus US$0.75 in cash for each Aurora share. The advertised value was calculated using Curaleaf’s August 10 closing price, not a price guaranteed when the transaction closes.
If Curaleaf’s shares appreciate sufficiently before the final calculation date, Curaleaf can reduce the exchange ratio to cap the total consideration at US$5 per Aurora share. If Curaleaf’s shares decline, there is no corresponding floor protecting Aurora shareholders.
“There’s an uncapped downside and there’s a capped upside, which makes it … kind of wacky,” said Scott K. Weiss, a corporate securities and mergers-and-acquisitions attorney who reviewed the circular at mg Magazine’s request. Neither Weiss nor his firm, Weiss Brown, represents a party to the bid.
Aurora’s board has told shareholders to take no action while a special committee evaluates the offer. That review will have to answer a broader question than whether US$4 represents a premium to Aurora’s unaffected market price: What would shareholders be giving up, what would they receive in its place, and what would happen to those who decline?
- Curaleaf’s advertised US$4 offer consists of US$0.75 in cash and mostly Curaleaf stock. Its value can fall with Curaleaf’s share price, but the offer’s upside is capped at US$5.
- Aurora shareholders would exchange a debt-free, Nasdaq-listed investment for shares in a leveraged company that trades domestically on the OTCQX market.
- Curaleaf’s circular appears to contain outdated language suggesting a future U.S. exchange listing would eliminate Chairman Boris Jordan’s enhanced voting control.
- Shareholders who do not tender could remain minority investors in a Curaleaf-controlled Aurora, while U.S. holders who tender face uncertain tax treatment.
US$4 is a reference point, not a guarantee
Curaleaf stated the offer represents a 45-percent premium to Aurora’s 30-day volume-weighted average price of US$2.75 as of August 10. Excluding Aurora’s cash, Curaleaf calculated the premium at 110 percent.
Those comparisons are mathematically useful, but they do not convert the offer into cash. More than four-fifths of the initially stated value consists of Curaleaf equity, exposing Aurora shareholders to changes in Curaleaf’s share price until the offer’s conditions are satisfied or waived and the consideration is calculated.
The one-sided adjustment is important. Above the specified cap price, the number of Curaleaf shares issued per Aurora share declines. Below the initial reference price, Aurora holders continue to receive the base exchange ratio and absorb the reduced value.
The bid is not subject to financing or due-diligence conditions, which removes two common sources of transaction uncertainty. It remains subject to numerous other conditions, including regulatory approvals and the absence of developments Curaleaf determines could have a material adverse effect on Aurora.
Weiss described the material-adverse-effect provision as a broad contractual right, because numerous factual circumstances could fall within it. He cautioned that whether Curaleaf could invoke the provision successfully would depend on the particular facts and applicable Canadian law.
Different companies, different risks
Curaleaf portrays its proposal as an opportunity for Aurora investors to exchange years of restructuring, dilution, and write-offs for an interest in a larger company with greater scale. Aurora counters that Curaleaf is attempting to acquire its EU-GMP production facilities and international medical platform at the lowest possible price.
The latest financial reports support pieces of both arguments.
Aurora entered the contest with a notably clean balance sheet. It reported C$149.1 million in cash, cash equivalents, and short-term investments at June 30, with no debt.
The company’s overall quarter was considerably weaker. Net revenue declined 9 percent to C$67.6 million, adjusted EBITDA fell to C$3.4 million from C$10.8 million, and free cash flow shifted to an outflow of C$5.8 million from an inflow of C$6.8 million. A federal reimbursement change reduced Canadian medical revenue as Aurora continued winding down its Canadian consumer business, while growing demand in Germany helped international medical revenue rise 17 percent to C$43.3 million.
Curaleaf is much larger and reported stronger operating momentum. Its second-quarter revenue rose 10 percent to US$340 million, adjusted EBITDA reached US$70 million, and international revenue increased 26 percent to US$51.4 million. Curaleaf ended June with US$107 million in cash and US$611.5 million in outstanding debt, net of unamortized discounts and deferred financing fees.
Most of that debt reflects a February refinancing rather than new borrowing. Curaleaf issued US$500 million in senior secured notes primarily to repay US$457 million in notes due in December 2026. The refinancing extended the company’s principal maturity to February 18, 2029, but the new notes carry an 11.5-percent interest rate, representing approximately US$57.5 million in annual interest.
The companies report in different currencies and under different accounting frameworks, making direct line-by-line comparisons hazardous. The broad contrast nevertheless matters. Aurora holders would exchange shares in a smaller, debt-free company whose recent profitability and cash generation weakened for equity in a larger, leveraged company reporting stronger revenue growth and operating cash flow. They also would exchange a Nasdaq- and Toronto Stock Exchange-listed security for Curaleaf shares traded on the TSX and, in the United States, on the OTCQX market. That change could affect liquidity, brokerage access, and the range of institutional investors able to hold the shares.
Curaleaf’s reported US$12.5 million quarterly net income also requires context. The company recorded a US$26.3 million pre-tax loss from continuing operations and a US$38.8 million income-tax benefit. The benefit followed the April federal rescheduling order and Curaleaf’s reassessment of deferred tax assets and uncertain tax positions associated with qualifying medical cannabis activity.
That accounting change has real potential value, but it was not operating revenue or cash generated by selling cannabis. Curaleaf also reported a US$468.5 million liability for uncertain tax positions as of June 30, including positions associated with adult-use operations, medical activity before April 23, and prior tax years.
The financial record therefore does not support a simple rescue narrative in either direction. Curaleaf is not a weak bidder searching for a balance-sheet repair, and Aurora is not a distressed company devoid of strategic value. Shareholders are being asked to choose between two materially different financial and operating risk profiles.
An apparent conflict in the voting disclosure
The Curaleaf shares offered as payment carry one vote apiece. Curaleaf’s multiple voting shares carry 15 votes each and are controlled by Chairman and Chief Executive Officer Boris Jordan.
Curaleaf changed an important provision governing those shares shortly before launching its bid. In its August 6 quarterly report, the company stated an amendment to its articles of incorporation, effective June 23, eliminated the automatic conversion that previously would have turned the multiple voting shares (MVS) into subordinate voting shares (SVS) after a listing on Nasdaq, the New York Stock Exchange, or another approved U.S. marketplace.
“Accordingly, the MVS will no longer automatically convert into SVS upon such a listing,” Curaleaf stated in Note 17 of the report.
The August 18 offer circular appears to say otherwise. On pages 64 and 65, it describes the multiple voting shares as converting automatically upon several possible events, including the first business day after Curaleaf’s first annual meeting after shares “are listed and posted for trading on a U.S. national securities exchange, such as Nasdaq or The New York Stock Exchange.”
The circular reports that Jordan controlled 69.2 percent of Curaleaf’s voting power as of August 17. It estimates Aurora shareholders collectively would receive approximately 9 percent of the combined company’s equity but only about 3 percent of its voting power if Curaleaf acquired all outstanding Aurora shares.
The discrepancy is particularly relevant for Aurora’s U.S. shareholders. They are being asked to exchange a Nasdaq-listed security for Curaleaf shares that trade domestically on the OTCQX market. At the same time, Curaleaf’s June amendment means a future listing on Nasdaq or another U.S. national exchange no longer would trigger the automatic conversion of Jordan’s multiple-voting shares. Aurora shareholders therefore cannot assume a future Curaleaf uplisting would eliminate the company’s existing supervoting control structure.
Weiss called the conflicting language an apparent mistake and predicted Curaleaf would correct the circular through an amendment.
Curaleaf acknowledged mg Magazine’s inquiry and said it would examine the apparent inconsistency but did not provide answers or clarification before the publication deadline.
The discrepancy does not by itself establish an attempt to mislead investors. Curaleaf disclosed the effective amendment clearly in its own quarterly report, and its shareholder materials previously explained the proposal. But the outdated description is relevant to Aurora holders because it concerns the governance rights attached to most of the consideration Curaleaf is offering them.
Three thresholds, three different outcomes
The offer’s percentages determine how much control Curaleaf could obtain and how readily it could acquire the remaining shares.
Canadian takeover rules require more than 50 percent of the shares held by independent Aurora shareholders to be tendered before Curaleaf can take up any shares. That statutory minimum cannot be waived.
Curaleaf added a separate condition requiring at least 66⅔ percent of Aurora’s shares on a fully diluted basis. Curaleaf generally may waive that additional condition and close after clearing the statutory majority threshold.
The higher threshold makes the next step easier. If Curaleaf obtains at least 66⅔ percent, Weiss said it generally could use the shares acquired in the tender to approve an amalgamation (the Canadian term for a merger or business combination) or another second-step transaction under the process described in the circular, without requiring court approval.
“If Curaleaf acquires 50 percent of the shares but less than 66.67 percent, it gets awkward,” Weiss said. “Curaleaf will have satisfied the statutory requirement to get more than 50 percent in the tender, and could waive its 66.67-percent minimum condition and close the tender. Curaleaf would then control Aurora, but it would not have enough shares to force the second step. It would have to purchase additional Aurora shares in the market, privately negotiate purchases, conduct another tender offer, remain Aurora’s 50-percent-plus controlling shareholder,” or use some combination of those options.
“At that level, Curaleaf could also use its voting control to elect Aurora’s directors and exert substantial influence over Aurora’s management and strategic direction, but it generally could not force the remaining shareholders to sell their shares without first obtaining the additional votes required for the second-step transaction.”
If holders of at least 90 percent of the shares subject to the bid accept the offer, Curaleaf generally could use British Columbia’s statutory compulsory-acquisition procedure to acquire the remaining shares on the same terms. Section 300 of the province’s Business Corporations Act entitles and binds an acquirer using that process to pay the same price and use the same terms unless a court orders otherwise.
What happens to shareholders who do not tender?
Minority shareholders would continue to own Aurora shares unless Curaleaf completed a compulsory acquisition or another second-step transaction. Their practical position could become less attractive, however.
Majority ownership alone would not automatically delist Aurora or terminate its public-reporting obligations, and Curaleaf acknowledges in the circular that Aurora would remain public if Curaleaf could not complete a compulsory acquisition or subsequent transaction.
“Control of the Board could allow Curaleaf to cause Aurora to seek a voluntary delisting from Nasdaq or TSX,” Weiss said, “but it would still have to comply with the applicable exchange rules, corporate approvals, and other securities laws. It’s unclear whether Curaleaf would be able to accomplish a delisting. But if the company went that route, the delisting would provide additional incentive for the remaining stockholders to sell their shares to Curaleaf.”
The possibility creates liquidity risk. A smaller public float could reduce trading activity and leave holdouts with less influence over a company controlled by the bidder. A later delisting could make the shares harder to sell and increase pressure to accept a subsequent Curaleaf offer.
“The question is: Is it still public? Do they still have a market to sell in?” Weiss said.
Aurora’s shareholder-rights plan is unlikely to prevent the initial tender.
“Curaleaf deliberately structured the tender offer to qualify as a ‘Permitted Bid’ under Aurora’s shareholder rights plan: The offer was made to all stockholders, remains open for 105 days, requires more than 50 percent of shares to tender before Curaleaf can close, permits shareholders to withdraw before closing, and extends the offer for 10 days if 50 percent is reached,” Weiss said. “Assuming it continues to meet those requirements, the rights plan, or ‘poison pill,’ should not meaningfully block the tender offer.”
The tax result is not promised
U.S. Aurora holders face another uncertainty, because Curaleaf has not promised to structure the acquisition or a second-step transaction to produce tax-deferred treatment.
If a shareholder realizes an overall loss, the cash component of the transaction does not by itself create taxable gain. If the shareholder realizes a gain, the situation gets a bit more complicated, Weiss said.
“The question is whether that gain is tax deferred because the transaction qualifies as a tax-deferred reorganization,” Weiss said. “In a tax-deferred reorganization, a U.S. holder will recognize gain and pay tax only up to the amount of cash received. The remaining embedded gain in the form of stock carries forward until the stockholder ultimately sells the Curaleaf stock received in the transaction.”
In this offer, the cash component is US$0.75 per Aurora share. If the acquisition does not qualify for tax-deferred treatment, a shareholder could be required to recognize gain based on the value of both the cash and Curaleaf shares received, potentially producing a tax bill even though most of the consideration came in stock.
Weiss, who also is a certified public accountant, said Curaleaf has not promised to structure the acquisition or a second-step transaction to obtain tax-deferred treatment.
“Curaleaf explicitly says in the tender offer document that it is under no obligation to effect a certain tax result and, in fact, it doesn’t expect U.S. stockholder tax consequences to be a significant factor in deciding how it structures the subsequent transaction,” he said.
The decision Aurora’s board must make
Aurora’s special committee has retained legal, financial and shareholder advisers to evaluate the bid and prepare the directors’ circular required under Canadian law. Its choices include recommending acceptance, recommending rejection, negotiating improved terms with Curaleaf or seeking another strategic alternative, including a competing bidder.
“They have to analyze Aurora’s standalone value — how much it is really worth regardless of the market cap,” Weiss said.
That is also the decision confronting Aurora shareholders. The relevant comparison is not simply US$4 versus the price displayed beside Aurora’s ACB ticker symbol on a particular morning. It is Aurora’s standalone prospects versus a variable package of cash and Curaleaf equity, along with Curaleaf’s leverage, trading liquidity, concentrated voting control, uncertain tax treatment and ability to complete the acquisition.
The headline supplies a price. The fine print determines what that price means.
