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Pot producer Aphria shuns $2.1bn green growth bid

Dec 30 2018 12:41
Scott Deveau, Natalie Obiko Pearson and Eric Pfanner

Canadian marijuana producer Aphria rejected a planned $2.1bn hostile offer by US cannabis retailer Green Growth Brands, saying it significantly undervalues the company.

The proposed bid would be about 23% below Aphria’s average share price over a 20-day period, the Canadian company said in a statement. Columbus, Ohio-based Green Growth on Thursday offered C$11 per share in an all-stock bid for Aphria, a 46% premium over the closing price on Monday, after the stock plunged in November and early December.

"The board has determined that the GGB proposal, as it currently stands, significantly undervalues the company," Aphria Chairman Irwin Simon said in a statement Friday. Irwin was appointed Aphria’s independent chairman on Thursday, replacing Vic Neufeld who remains chief executive officer.

Aprhia said the US company went public with its proposal less than six hours after presenting it received the offer, describing the offer as "highly conditional" and not reflective of the Canadian producer’s future value.

Aphria set up an independent committee to consider the merger proposal and acknowledged in Friday’s statement that it has a "passive investment" in Green Acre, an investor in Green Growth Brands. Aphria was one of the two lead investors in Green Acre when it was founded in January 2017. Neufeld and Shawn Dym, an Aphria director, also sit on the advisory board of Green Acre, according to an August statement. Dym was on the board of Green Growth Brands at least until October.

The independent committee is made of directors with no relationship to Green Acre or Green Growth, Aphria said.

Easy target

Aphria, one of Canada’s biggest pot producers, became an easy target after its share price almost halved in two days when short-sellers Quintessential Capital Management and Hindenburg Research alleged on December 3 that the company overpaid for Latin American assets held by insiders.

The Leamington, Ontario-based company called the allegations false, saying the purchase was a transaction negotiated at arm’s length and that both companies retained professional financial advisers. Aphria appointed a special committee of independent directors to review its acquisition of LATAM Holdings, which was targeted in the short-seller report. An independent chairman will advance the company’s "governance best practices," Aphria said on Thursday.

"They’re currently at an attractive value in the market," Green Growth CEO Peter Horvath said in a phone interview on Thursday, adding that his company, which makes beauty and wellness products using cannabis-derived ingredients, had been in talks with Aphria for a few months and was impressed by its capabilities after touring its production facilities.

While Quintessential’s allegations are "something to be concerned about," the transaction, if successful, would take at least three months to complete, Horvath said. "In that time period, we should have an understanding if there is any overhang at all."

Stock jump

Aphria’s US-listed shares jumped as much as 33% in late trading after Bloomberg first reported on Green Growth’s plans. They were up 13% to $6.29 at 7:20 a.m. in New York on Friday.

The offer would give Aphria shareholders 1.5714 common shares of Green Growth for each Aphria share. Green Growth discussed a friendly offer with Aphria’s board before announcing its intention to launch a hostile bid and believes it has support from investors holding about 10% of outstanding Aphria shares, Green Growth said in a statement.

Green Growth approached Aphria’s board about a week ago with a proposal and has also acquired about 3 million shares in the company, Horvath said.

"We were looking for the most positive and friendly way to do this, but I think ultimately, we felt like a delay would be unnecessary," given the premium being offered, said Horvath, who previously held executive positions at Victoria’s Secret and American Eagle Outfitters. "We wanted to be proactive and reach out directly to the shareholders."

Pot consolidation

The bid for Aphria marks further interest in an industry that BMO Capital Markets estimated could reach C$120bn in recreational sales globally by 2025. Canada was the first Group of Seven country to legalise the drug for recreational use on October 17 and more US states are moving in that direction though it remains banned at the federal level.

Budweiser brewer Anheuser-Busch InBev NV teamed up to run a research partnership with Tilray earlier this month, each investing $50m, though Tilray will remain independent. Molson Coors Brewing signed a joint venture with Hexo Corp. in August, while Constellation Brands is now the biggest shareholder in Canopy Growth Tobacco company Altria Group announced a $1.8bn investment in Cronos Group this month.

The cannabis market in the US and Canada combined is expected to reach $47bn by 2023, Horvath said.

Current laws wouldn’t allow pot produced by Aphria in Canada to be shipped to Green Growth’s retail business in the US. "We’re making this decision based on taking the talent from both organisations and leveraging it across the different geographies," Horvath said. "You can’t move product but you can certainly transport intellectual property and capability. It’s about combining our consumer expertise with their grow expertise."

Green Growth is being advised by Canaccord Genuity Group Inc., with Norton Rose Fulbright Canada LLP as legal adviser.

us  |  shares  |  marijuana  |  cannabis
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