David George-Cosh

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Aphria Inc. and Aurora Cannabis Inc.​ recently held advanced talks to merge the two Canadian pot producers in what would have been a blockbuster deal, but those discussions broke down late last week, according to two people familiar with the matter.

The two companies opted to step back from merger discussions that took place over several weeks after failing to agree on board composition and compensation for some senior executives, the people told BNN Bloomberg under the condition of anonymity. It is not known if the two companies will revisit merger talks in the future, the people said. The negotiations have not previously been reported.

Michelle Lefler, vice-president of communications at Aurora, told BNN Bloomberg in an email that the company's practice is "not to comment on rumours or speculation."

Aphria chief corporate affairs officer Tamara Macgregor told BNN Bloomberg via email that "while the company may engage in discussions with potential strategic partners from time to time, the company can confirm that there is no agreement, understanding or arrangement of any kind in place with Aurora regarding any potential transaction or merger between the parties."

Macgregor added that Aphria will "advise the investment community of any material events to the company, if and when they occur."

Before the two companies decided to walk away from negotiations, executives agreed on terms that would have seen Aphria shareholders control about 51 per cent of the combined company, while Aurora shareholders would own the remaining 49 per cent, the people said. The deal would have been conducted via a share swap, according to one of the sources who was not familiar with the planned exchange ratio.

As well, Aphria Chief Executive Officer Irwin Simon was set to become CEO of the combined entity while executives had already identified about $200 million in potential efficiencies that could be saved, the sources said. 

If a deal had been reached, it would have created a global cannabis behemoth valued at $3.5-billion with operations in 25 countries while commanding a leading 30 per cent share of the Canadian recreational cannabis market and combined annual revenue north of $800 million.

Were a deal between Aphria and Aurora to happen, it would shake up an industry that has struggled to meet expectations since recreational marijuana became legal two years ago. Softer-than-expected revenue, a sluggish rollout of licensed retail outlets across Canada, and a still-thriving illicit market all hampered industry players, many of which have seen their shares plummet by more than 90 per cent in value over the past year.

On top of that, the COVID-19 pandemic has weighed on several cannabis producers that have struggled to find additional capital to help weather the current economic climate, causing hundreds of layoffs and forcing several operators into creditor protection.

However, some analysts have stated the need for further M&A within the cannabis space to help alleviate an oversupplied market while also ensuring that pot producers are on a clear path toward profitability.

"As the industry matures over the near term, much more M&A is expected," wrote Jefferies LLC analyst Owen Bennett in a report to clients last month.

Since cannabis was legalized in Canada, Aurora and Aphria have largely followed different paths. Aphria's reputation on Bay Street was hurt following a short-seller's report released in December 2018 that alleged the company overpaid for assets in the Caribbean and South America and claimed senior executives engaged in self-dealing. 

Aphria said two months later that a special committee concluded the purchases of those assets were within an “acceptable range” compared with similar acquisitions by competitors, although there were certain conflicts in the boardroom that weren't properly disclosed.

Aphria appointed Simon as CEO after former head Vic Neufeld announced his retirement in the wake of the short-seller's report. Under Simon's watch, the company has slashed costs and improved its balance sheet to emerge as one of a handful of cannabis companies to deliver a quarterly profit.

Aurora, on the other hand, has laid off roughly 1,200 employees; closed production facilities in Alberta, Quebec, and Saskatchewan; and wrote down over $1 billion in assets after reporting a string of disappointing quarterly losses. As a result of the steep losses, the Edmonton-based company's co-founder Terry Booth stepped down as CEO in February and later resigned from its board. Aurora has stated it intends to report positive adjusted earnings before interest, taxes, depreciation, and amortization by the end of this year.​

Cannabis Canada is BNN Bloomberg’s in-depth series exploring the ongoing growth of the Canadian recreational cannabis industry. Read more here and subscribe to our Cannabis Canada newsletter to have the latest news delivered directly to your inbox every day.