What just happened with Aurora Cannabis is unbelievable…
I’ve written a lot about good and bad financings.
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Briefly, in a hot market, it’s easy to do a financing round that current shareholders cheer.
Sure, the stock might be down for a day or two after a company sells new shares, but every time a company issues shares at a higher price, it is raising money to put to work at a price higher than earlier shareholders have paid.
That benefits them if the money is put to work productively.
But in a tough market, we find out who is strong and who is weak. The strong companies find a way to raise money with minimal or no dilution to current shareholders who are mostly in at prices higher than the current share price.
Weak companies have to dilute existing holders just to survive, and that means that even when things turn around, the existing shareholders have to share the gains with those who bought shares that were issued at low prices.
On Friday, Aurora Cannabis Co. (NYSE: ACB) announced what may be the worst financing I’ve ever seen from a company that is not a scam.
It didn’t even look like a financing!
Here’s what happened…
The Terrible “Financing” Decision
On Friday, Aurora announced earnings. Most Canadian producers had a bad quarter because of inventory adjustments among the poorly-run provincial cannabis distributors and lower wholesale prices, but Aurora’s results were uniquely bad.
The announcement drove down the share price, as it should have.
But Aurora had another chapter to add to its sad story. The company has $230 million of convertible debt due in March. The debt is convertible at $13.50 per share, compared to Aurora’s Thursday closing price of $3.29.
So a conversion is not in the cards unless there is a sudden and severe change to Canada’s cannabis market. Aurora also only has $150 million of unrestricted cash, and Aurora doesn’t have good liquidity for its size.
A maturity of that debt in March could have killed Aurora entirely.
So what the company did is it lowered the conversion price temporarily. It basically said, “Hey, convert your debt to shares now at a lower price so we don’t have to pay you real cash come March.”
The price of the conversion? It’s based on the volume-weighted average price this week.
What that means is that the lower the share price is this week, the more shares debtholders will get.
And they knew this in advance of this week’s trading.
This creates a perverse incentive.
The Problem Aurora Created
The debtholders who believe in Aurora’s future want the share price to go down this week; not up. If they own existing shares, they might sell. They certainly aren’t buying. And those debtholders who don’t believe in Aurora’s future can sit tight, since the company will have the cash to pay those stragglers off in March.
I’d be tempted to say that this all creates a nice buying opportunity to buy Aurora shares, but I don’t think it does.
It’s more of a continuation of Aurora’s history of being generous with its shares, something I noted in the exclusive NICILytics report on the company. Aurora has over 1 billion shares outstanding already, and at current prices, it will create nearly 100 million more.
Who knows what the total will be when the week ends and Aurora does the share calculation?
A company’s structure and its financing ability is incredibly important to a company’s success.
And one of the reasons I haven’t recommended Aurora is that it has not been careful with its shares.
This week we’re finding out the cost of that strategy.
Executive Director, National Institute for Cannabis Investors
13 responses to “The Cost of Aurora’s Poor Planning”
November 20 2019