Aphria Rejection Should Pave the Way for a Better Bid

Aphria Inc. (TSX:APHA), one of the Canadian marijuana stocks, rejected a hostile takeover bid by Green Growth Brands Inc. (CSE:GGB)

SmallCapPower | February 8, 2018: Aphria Inc. (TSX:APHA) (NYSE:APHA), one of the Canadian cannabis stocks, fell more than 9% on Wednesday after the company rejected a hostile takeover bid by Green Growth Brands Inc. (CSE:GGB), saying the bid is significantly undervalued and not in the best interests of its shareholders.

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Green Growth’s hostile bid was officially made on January 22, 2019 with the expressed exchange ratio of 1.5714 GGB shares for each Aphria share, translating into an implied consideration of $5.59 per Aphria share, which is a 23% discount to the volume weighted average price of Aphria shares of $7.26, as per the director’s rejection document hosted on the Aphria website. The document further states that based on the closing price of $5.87 per GGB share on the CSE on February 4, 2019, the implied consideration would be $9.22 per Aphria share, a 35% discount to Aphria’s closing price on the TSX of $14.21 per share on February 4, 2019.

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Notwithstanding the arguments of Aphria, shares of Aphria on the TSX have gained nearly 75% since Green Growth announced its intention publicly to make a takeover bid on December 27, 2018, and up 50% post its official bid on January 22, 2019 and February 5, 2019, a day before Aphria rejected the offer. That said, shares of Aphria crashed in December to under C$5 following a report by short-seller Quintessential Capital in early December, driving GGB to launch the hostile bid in late December.

Apart from the undervalued offer, Aphria says the bid is not in the best interests of its shareholders as it:  would result in delisting shares from the TSX and NYSE, thereby reducing liquidity; result in Aphria shareholders giving GGB shareholders a 36% interest in Aphria in exchange for shares in a company with limited operations, and the absence of any synergies. To illustrate, Aphria’s revenue in the most recent quarter is 10 times that of GGB ($22m vs $2m), while production capacity is ~100x (255,000 kg/per vs 1600 kg/per year).

Aphria would seemingly benefit by being acquired since it is the fifth-largest Canadian marijuana producer by market cap in Canada, if you include U.S.-listed Tilray. Yet despite being among the lowest-cost producers ($1.30 per gram), Aphria lacks a strong retail presence. This makes the Company desirable, especially by a larger retail player in the United States.

Headquartered in Leamington, Ontario, Aphria is a low-cost cannabis producer with presence across 10 countries globally. Aphria stock currently trades at a market cap of $3.2 billion.

Disclosure: Neither the author nor his family own shares in any of the companies mentioned above.

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