The cannabis industry has found a friendly home in Canada, and a new private-investment-in-public-equity investment is giving a cannabis company what could ultimately be more than a 40% stake in a liquor distribution chain.
Aurora Cannabis Inc. is investing more than $100 million in Canadian alcohol provider Liquor Stores NA Ltd.
"In the U.S. we are carefully watching the exciting capital markets activity in Canada as a precursor to what we expect to be an explosion of deals in the U.S. when federal restrictions on cannabis are lifted," Duane Morris partner David Feldman told The Deal.
"This appears to be a particularly large potential investment and meaningful also because it portends more and more crossover ownership and marketing opportunities between the cannabis and liquor industries."
Aurora shares, which trade on the TSX, were up over 13% after news of the PIPEs emerged on Feb. 5.
The investment comes in the form of two PIPEs that will initially block the investor's ownership just below 20%. But warrants baked into the deal could eventually make that stake closer to 40%.
The investment consists of an $84 million common stock PIPE and a $28 million prepaid warrant PIPE.
Warrants could create a very large stake for Edmonton, Alberata-based Aurora.
"Liquor Stores will also issue to Aurora, for no additional consideration, two classes of Share purchase warrants: (1) 10.13 million warrants at an exercise price of $15.75 per Share to allow Aurora to increase its pro rata equity interest in Liquor Stores to 40% on a fully diluted basis ; and (2) up to 1.75 million warrants exercisable by Aurora at an exercise price of $15 upon any conversion of any of the outstanding 4.7% convertible unsecured subordinated debentures of Liquor Stores," Aurora said in a Feb. 5 news statement.
The deals come after Cannabis investing in cannabis has expanded dramatically after medicinal use was legalized. Recreational use will likely become legal this year.
Other recent deals in cannabis have involved substantial capital.
Last year liquor company Constellation Brands invested more than $200 million in a cannabis company, and last year Aurora set its self up for a $1 billion acquisition of CanniMed Therapeutics Inc. that was funded partially by a large PIPE transaction.
Retrograde choices in the U.S., particularly an essentially infantile policy articulated by Attorney General Jeff Sessions, are likely to tilt the board even more favorably in Canada's favor.
"While very large private financings from high net worth groups and family offices into U.S. cannabis companies have taken place and grown in size and number, the ability to conclude larger deals such as the Aurora-Liquor Store deal have mostly eluded U.S. players," Feldman said.
"When U.S. investment banks and private equity firms enter the market, not likely until after the federal prohibition is eliminated, the opportunities for capital formation in the U.S. cannabis industry likely will grow very dramatically."