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UPDATE 3-Canada's Aurora Cannabis to buy smaller rival to create No. 2 producer

producer@ (Adds value of global cannabis deals in 3rd paragraph, Aurora comment in 9th, Factbox on world's top marijuana M&A, updates share prices)

Jan 24 (Reuters) - Canada's No. 2 marijuana producer Aurora Cannabis Inc has agreed to buy smaller rival CanniMed Therapeutics Inc for C$1.1 billion ($852 million) as companies jostle to benefit from the country's legalization of recreational marijuana use later this year.

The deal to create the world's top marijuana producer by market value follows months of tensions between the companies. Aurora had made a hostile bid capped at C$24 per share for CanniMed, and the new offer went up to C$43.

The deal marked the world's biggest marijuana industry transaction, bringing the value of cannabis deals so far this year to $1.2 billion, more than double 2017's total, itself a record high, according to Thomson Reuters data.

(Factbox on top global marijuana deals:)

The activity has been largely concentrated in Canada, which is set to legalize recreational use of marijuana by mid-2018, becoming the second country in the world to do so after Uruguay.

With countries including Australia and Germany allowing medical marijuana and many others moving closer to doing so, Canada's early move gives it an edge. While several U.S. states have legalized cannabis for medical or recreational use, the substance remains illegal at the federal level.

By buying CanniMed, Aurora hopes to bolster its capacity to meet domestic demand and increase distribution around the world.

"The action is where the medical cannabis export markets are, which are much larger than Canada," said Chris Damas, editor of the BCMI Cannabis Report. "CanniMed has patents, they have relationships with different universities, research and clinical trials, and export relations with other countries, and Aurora wants to add to their own relationships in Europe."

'QUITE A JOURNEY'

Canadian cannabis stocks have been on a tear in anticipation of the surge in demand, but have prompted fears of a bubble and predictions for corrections from many market commentators. But so far the sector has continued on a relentless upward path.

CanniMed rose 16.1 percent at C$43.19 after jumping as much as 23 percent. Aurora was up as much as 2.7 percent but later reversed course to fall 2.2 percent to C$14.47.

Aurora shares have sky-rocketed 431 percent over the past three months, while CanniMed is up 290 percent.

CanniMed was itself engaged in a friendly deal to buy Newstrike Resources Ltd, but it was called off.

Newstrike dropped 20.3 percent to C$1.45, extending Tuesday's 17 percent slide.

"It's been quite a journey, but the things we're going to do together in 2018 and beyond will be amazing," Aurora Chief Corporate Officer Cam Battley told Reuters. "Newstrike wasn't really on our radar screen. Our interest was primarily in CanniMed."

The deal would give the combined entity a market value of C$7.5 billion, overtaking Canopy Growth Corp's C$6.7 billion, and make it the world's biggest marijuana company by market value. Canopy shares fell 4.8 percent to C$34.87 in their third session of losses.

"If I were Canopy, I'd be concerned," Damas said. "The bigger Aurora gets, the more competition (Canopy is) going to face in both Canada and overseas."

Still, Canopy will retain its leading position, with capacity at existing and planned facilities exceeding those of both Aurora and CanniMed.

The new combined entity's market value would also top some older and well-established Canadian companies, including Bombardier Inc, which is valued at about C$7.1 billion.

Aurora's revised offer of 3.4 of its shares for each CanniMed security, equates to C$43.00, based on an implied share price for Aurora of C$12.65, a 15 percent premium to CanniMed's closing price on Tuesday.

The deal requires shareholder and regulatory approvals. ($1 = 1.2329 Canadian dollars)

(Reporting by Nichola Saminather in Toronto and Anirban Paul in Bengaluru; Editing by Andrew Hay and Jeffrey Benkoe)