Aphria Divestment Set to Unshackle its Stock Price?

In this market news, Aphria Inc. (TSX:APH), one of the Canadian marijuana stocks, said it has divested its remaining U.S. cannabis assets from its balance sheet

SmallCapPower | September 12, 2018: Aphria Inc. (TSX:APH) announced recently that it has entered into a share purchase agreement with a group of individual buyers, including a member of the Serruya family, and has completed a 100% stake sale in Liberty Health Sciences for 64,118,462 shares. As part of the transaction Aphria, one of the Canadian cannabis stocks, retains an irrevocable option to repurchase the shares or any replacement securities from the buyers for a period of up to five years, subject to the satisfaction of certain conditions. As a result of the transaction, Aphria has divested its remaining U.S. cannabis assets from its balance sheet in accordance with the staff notice and requirements of the Toronto Stock Exchange. The Company has significantly improved its liquidity position while it continues to focus on the many opportunities within Canada and in other legal cannabis markets around the world.

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The buyers of the shares are purchasing 64,118,462 shares of Liberty in exchange for a five-year promissory note due September 6, 2023 bearing interest at 12% per annum, in the amount of $59,097,986. Until such time as the promissory note is repaid, the shares of Liberty or any replacement securities will be held in an escrow account by an independent escrow agent as security for the obligations under the promissory note. In the event of a default under the promissory note, the shares or other replacement securities will be released from escrow by the escrow agent and sold with the net proceeds being paid to Aphria.

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Additionally, Aphria has secured an irrevocable option with the buyers pursuant to a Note Purchase Agreement to repurchase the shares of Liberty or any replacement securities from the buyers for the value of the promissory note, together with any interest thereon. In consideration for the grant of the option to repurchase such securities from the buyers, the Company will pay a pro-rata cash payment to each of the buyers on an annual basis. The exercise of the option by the Company is conditional upon certain conditions being satisfied, including the federal legalization of cannabis in the United States and that the TSX approves the exercise of such option and the repurchase of such securities. The obligations of the buyers under the Note Purchase Agreement are guaranteed by certain affiliates of the buyers pursuant to the terms of a Guarantee.

Aphria Inc’s stock price has been flat year to date, likely owing to the fact that the TSX has warned of possibly delisting Canadian cannabis companies with U.S. assets, as marijuana is still illegal there at the federal level despite being permissible in many U.S. states.

Aphria CEO Vic Neufeld said, “Given the current federal legal framework in the United States, we have made the strategic decision to divest our remaining U.S. holdings at this time in order to permit us to focus on other more immediate capital markets and strategic opportunities in Canada and in other legal markets around the world. Not only does this transaction result in a significant gain to the Company it also enables Aphria to advance its existing global strategic plan unencumbered by U.S. exposure at this time. We view this decision as only a temporary departure from investment in the U.S. cannabis industry until such time as U.S. federal cannabis laws are reformed. We have always believed in the tremendous opportunity in the U.S. cannabis market, and that is no different today. We intend to be a significant player in the U.S. cannabis industry at the appropriate time in the future and, in the interim, we look forward to watching our strategic partner Liberty continue to execute on the many opportunities emerging today.”

Aphria trades at a market capitalization of $5.04 billion with a price to book multiple of 3.92x.

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

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