Aphria U.S. Asset Sale Should Lift Its Stock Price

By selling its stake in the U.S.-based company, Aphria Inc. (TSX:APH) seems to be trying to avoid issues with Canadian regulators as well as the TSX

SmallCapPower | February 5, 2018: Aphria Inc. (TSX:APH) on February 2, 2018, announced a deal to divest its holding in Arizona-based marijuana company Copperstate Farms to Liberty Health Sciences Inc. (CSE:LHS) for a total consideration of $20 million. The selling of its stake in the U.S.-based company by Aphria is aimed at avoiding issues with Canadian stock markets and regulators.

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In October 2017, the Canadian Securities Administrators brought out “specific disclosure expectations” for marijuana sector firms that have investments in the United States. The regulator asserted that cannabis companies must reveal to the investors about risks involved while they invest in U.S.-based companies as growing and selling marijuana is illegal under federal laws. It includes divulging the legal regime and constraints a firm operating in the U.S. faces as well as the likely fallout in case the legal scenario for cannabis changes. On the same day of the announcement by Canadian regulators, TMX Group Limited, operator of the Toronto Stock Exchange, said that it might consider delisting stocks of cannabis firms that have operations in the U.S.

Furthermore, in January 2018, U.S. Attorney General Jeff Sessions revoked an Obama-era memo, which suggested that there will not be intervention by the federal government in states where cannabis is legal.

Chief Executive Officer (CEO) of Aphria Vic Neufeld said, “The sale of Copperstate is an important step in our continued efforts to work collaborately with the TSX and Canadian securities regulatory authorities regarding the divestiture of our direct investment in a U.S. cannabis business. We are assessing solutions that meet the needs of Aphria while protecting shareholder interests and maintaining shareholder value. On behalf of the Aphria team, I would like to acknowledge the great work being done by Copperstate to provide high-quality medical grade cannabis to Arizona patients. Liberty and its strong management team will be a great partner for Copperstate moving forward.”

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Based in Snowflake, Arizona, Copperstate owns about 1.7 million square feet of greenhouses out of which about 348,000 square feet are in production of medical cannabis.

“This acquisition further demonstrates Liberty’s commitment to expanding its leadership position in the U.S. medical cannabis industry. The Copperstate team has strong operational expertise and we look forward to a productive collaboration to enhance the experience of Arizona patients,” said George Scorsis, Director and CEO of Liberty.

The boards of both companies have unanimously approved the deal, which is expected to close in the second quarter of 2018.

Additionally, Aphria is planning to sell its 25% holding out of total 38% stake in Liberty Health Sciences. A spokesperson said that Aphria is “exploring and considering strategic alternatives with respect to its U.S. cannabis related interests, including the possible divestiture of its investments to strategic, long-term and committed investors in the cannabis industry.”

A big overhang for Aphria, compared to its cannabis peers, has been the Company’s holdings in certain U.S. cannabis assets. The current divestment is part of the Company’s continued efforts to meet Canadian and U.S. regulatory requirements and is a long-term positive for Aphria. However, shares of Aphria fell 10.3% to close at $13.88 on the TSX on Friday, which can be partly attributed to the global sell-off in equities and recent weakness in the cannabis sector as a whole.

Aphria is swiftly expanding through acquisitions in order to meet the proliferating demand for medical cannabis and the potential demand for recreational use. On January 29, 2018, Aphria inked a definite agreement to buy Nuuvera Inc. (TSXV:NUU), a global cannabis company with a presence in Europe, the Middle East and Africa, for $826 million. Aphria currently trades at a market cap of $2.2 billion, 87.6x its TTM sales of $25.46 million.

Disclosure: Neither the author nor his/her family own shares in the company mentioned above.

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