VIDEO: Aphria Inc (TSE:APH) CEO Vic Neufeld Discusses Nuuvera Inc (CVE:NUU) Acquisition
Aphria Inc (TSE:APH) (OTCMKTS:APHQF) (FRA:10E) CEO Vic Neufeld discusses his company’s acquisition of Nuuvera Inc (CVE:NUU) (OTCMKTS:NUUVF), a move that has drawn criticism from those who don’t really understand how the stock market works.
James West: Welcome back to Midas Letter Live. My next guest almost needs no introduction, but for those of you who don’t know, we’re with Vic Neufeld today, who’s the CEO of Aphria, Inc. Vic, thanks for joining us again today.
Vic Neufeld: Thanks for the invite.
James West: Vic, most recent news: you’ve made a complete and total acquisition of Nuuvera, shortly after its own go-public debut. Tell me about the strategy behind that.
Vic Neufeld: Yeah. It is an extremely exciting set of assets that Nuuvera has developed in a rather short period of time, probably about a year, as a private but also as a going-public company. And let me carve out the assets in two different components: first, let’s talk about domestic. They absolutely had the wherewithal and the entry points into certain Atlantic provinces’ recreational. At Aphria, we are really, really dominating our time and effort and energy on Ontario, on Quebec, on Alberta, on BC; all the time, we knew that the Nuuvera management team was really embedded nicely in terms of having rec brands on their shelves out in the Maritimes.
We were going to be their supply chain. So the first part of the acquisition excitement was really who and what they were in the Maritimes. And we looked at the situation and we said, we’re making healthy margins on a wholesale basis being their supply chain; I was envious of the recreational retail margins, and what we could do with our Aphria brands, knowing what they were – they being Nuuvera at the time – had to develop their own brands. And so that was part one of what really excited us, and the amount of kilos otherwise on their books at a retail margin.
Secondly, now let’s turn it to international. The international front, they had several countries with various licenses; and every country has a different adaptation of what they’re allowing for importation, and some are now requiring eventual in-country cultivation. Again, whether it was Germany, Israel, Ireland, Denmark, Spain, these were countries where we didn’t pay attention to from an infrastructure point of view. We were in other countries, but you can only do so much with a limited bandwidth of (unintelligible) [0:02:31] They provided the opportunity, and why did I have confidence in those assets? Because they came to us in December of 2017/early Jan of 2018, when we were in the acquisition mode of Double Diamond, 30-acre greenhouse, brand new, Dutch, just north of Leamington – our 51 percent/49 percent joint venture.
It was going to be capable of kicking out 120,000 kilos annually, post-Health Canada approval, and we were looking at, okay, so about half of that we had identified the eventual home; Nuuvera guys came to us and said, listen, can we do another offtake agreement for 60,000 kilos? They already had 17,000 kilo supply agreement with me from months earlier. So then we started to get really excited and said, wait a minute: 60,000? Where are we selling this to? And conversations developed and developed, and that’s how these various country licenses and those opportunities with a lot of traction, and a lot of sustainability, I may add.
Germany is one, but there were many other countries of importance in the scheme of things. So when people say that we overpaid for Nuuvera, when you look at the opportunities that they have developed, nurtured, and they moved the needle in certain respects with the Maritimes here in Canada rec, but also these other countries, it meant to us that we needed to acquire. Because the price we served up would have been double in a year from now. So there was a lot of value.
James West: All right. So Aphria International is what Nuuvera is going to be come – a wholly owned subsidiary, but trading under the Aphria symbol?
Vic Neufeld: Correct.
James West: All right. So then the strategy is, that’s sort of your Trojan horse to get into all of Europe, and so you say some countries in Europe are going to demand that the cultivation happens within the borders?
Vic Neufeld: Mm-hmm.
James West: Which countries would those be?
Vic Neufeld: So Germany and, not to be digging too deep in the onion here, but there’s two tracks of contracts: one are these infamous lot numbers for importation to start their journey, and then one is a true licensing application which again, Nuuvera, amongst many other Canadian LPs, have put a lot of effort and energy into trying to secure one of those licenses. That requires you to do in-country cultivation with a fully vertically integrated plan of going to market to service the medical platform. By that meaning, you better have lined up your drug importer, your master distribution entity serving the German pharmacies.
So without being too explanatory here, because a lot of this conversation is still underway, in terms of non-binding LOIs, we’re picking up where the Nuuvera guys left off. When you look at the chain of events and what you need to get to market in Germany, that’s exactly what we’re lining up and continuing the path forward. It’s pretty exciting, the strategies that were applied to get to where we are today, and to get across the finish line. And whether the German government is one month, six months from now, it’s all lining up to be a very successful business opportunity.
James West: Sure. I’m curious: you know, the obsession with obtaining one of the in-country cultivation licenses. I look at, you know, the prices of real estate agriculturally in places like Germany; I look at the advanced state and the abundance of real estate in Canada, and I ask myself, if cannabis as an ingredient for consumer-facing products is all about lowest cost of input for the raw material, which is extract, it seems to me like the only opportunity for German in-country grow is really going to be premium flower. Is that not the case? Because how can you compete with, you know, a place like Canada, where we can grow literally sections of land that’s already established, already under glass? You know, I just don’t see how that’s realistic on the European side.
Vic Neufeld: So economically, not speaking on behalf of the German government or the Italian government or the Spanish government or the Irish government, but collectively, many countries in the E-U want to have a level of independence. They don’t want to be beholden to any one country on importing a specific product that can be grown in-country, point one.
Point two, the research that sometimes is almost mandatory to be accompanied any licensed holder of in-country cultivation, is going to be part of the conversation, and no one better situated than Aphria, given our various research and science protocol studies that we are sponsoring and supporting in many areas around the world. So when you look at all of this, and then you compound the fact that it’s employment – everybody wants employment. There are regions of northern Italy, farming communities, for example, the wine belt; there’s compelling reasons why countries want it inside their borders.
James West: Wow, if they start plowing vines under for marijuana, that’s the day I go to war.
So let’s go back to the transaction, because I think that’s probably something that the market really wants to understand is, you basically funded the origin, in part, of Nuuvera. And then you turned around and paid 837 million for it, was it? Sorry, I’m not conversant with the number.
Vic Neufeld: Upon closing last Friday, the total value calculation is about $525 million.
James West: Five hundred and twenty-five, okay. So are you satisfied with the way that your share price reflects the transaction as of today?
Vic Neufeld: So between then and now, a lot of volatility in the marketplace – significant volatility.
James West: True, lots of negativity, yeah.
Vic Neufeld: The entire space has had selling pressures. But at the time, you have to understand, our independent committee, our special committee of independent board members, and seeking two different investment bankers for fairness opinions, came back and said truly the value of Nuuvera, based on their forward-looking – and every licensed producer is based on some future discounted cash flow of future earnings – when they looked at that, it was somewhere between $10.00 and $12.00 a share.
At the time we offered $8.50, went down to $8.10 because of cash deficiencies, and that’s the way it was concluded – absolute value. Let me just share with you and your viewers, between the various entry points that Aphria got involved in Nuuvera in funding, private placement and the RTO, we ended up owning approximately 5 percent of Nuuvera, with a cash injection of about $14 million.
Last Friday’s closing, that 5 percent was worth just shy of $50 million. So we didn’t pay 100 percent of equity participation; we only bought 95 percent, because we already owned five. It’s like paying yourself, kissing your sister.
James West: Right. Putting your hands in your pocket.
Vic Neufeld: My point is this: that Aphria shareholders, with the initial investment of 10 plus 2 plus 2, of 14 million, had a tremendous value growth up to just shy of $50 million based on our strategic investments of what we saw in the Nuuvera management team and their business plans, that we became more and more involved in and understanding. So to me, it was a very healthy investment of Aphria resources.
But back to your value proposition, between the domestic, the Atlantic provinces and the number of kilos that we’re expecting to receive from those provinces, and seven different country licenses, it was something that we just needed to be part of.
James West: Okay.
Vic Neufeld: And remember, they wanted 17 – they wanted 60,000 more. They wanted 77,000 kilos, and they had homes for it, or at least their business models had. Everyone is basing on expectations of license A, B, and C; well, when you look at margins that we were getting out of wholesale, they were healthy, they were nice, but it’s that retail margin. So it’s really something that was very exciting to us, and as the market underperformed, selling pressure, at the end of the day, it’s really 525 million that we ended up…
James West: Okay, let’s talk about that for a second, the down-draft in the market over the last little while. What’s causing that, in your opinion?
Vic Neufeld: I think just first of all our Senate, our beautiful Senate that last week voted approving it overwhelmingly, but there was that overhang for almost a month, depending on what media outlet you read and were trying to follow the bouncing ball: were they, or were they not, going to filibuster and kill this? Well, that’s now gone.
James West: Right.
Vic Neufeld: And there was a little uptick. But then again, with not enough, I’m going to say operational metric news, a lot of little sound bites on press releases but nothing really meaningful, the journey of recreational bell July 1, I think we can all sit here and say that’s not going to happen. It’s that August, September, October, November, it will be pushed out. And we have calibrated all of our plans that it will probably be closer to early fall, late summer early fall, and with that, I think investors are getting a little fatigued and they’re saying “I can’t wait that long”.
So everything comes under selling pressure, and then there are short-sellers, and short-sellers, once they latch onto an industry, a space, find some dominant companies that have a lot of liquidity, more than 50,000 shares a day, they latch onto it. And then, unfortunately, they get on investor newsletters and they throw these things out on the internet without any accountability, without any justification, a lot of fake news, and they throw it out there and hope people listen to them.
James West: Right.
Vic Neufeld: And when certain media outlets in Canada read it, pick up on it and try to make a story out of nothing, it just perpetuates the concerns that is already embedded in the space called cannabis, and my message to investors is, have patience and have trust and confidence that the last four years in the Aphria journey will be as impactful if not more successful going forward. We have a very strong management team, and we have a vision, we have a capacity that will be second to none going forward, banking on our DNA of quality greenhouse low-cost producer, and we have just got some home runs when it comes to recreational branding identity. We haven’t uncovered anything yet, purposely; we’re waiting for the strategic timing, but we are very excited about how we’re going to penetrate various provinces on their shelves once recreational is here.
James West: Okay. Vic, thanks for the update as usual; we’ll talk to you again soon.
Vic Neufeld: Excellent. Thanks, James.
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