Liberty Health Sciences, Aphria Links Remain As Divestiture Plays Out

Benjamin A. Smith
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Liberty Health Sciences Inc (CNSX:LHS) (OTCMKTS:LHSIF) may have a bit of a perception problem. With Aphria Inc.‘s forced stock divestiture to a group of buyers led by members of the Serruya family in February, some investors believe the link between both companies will be inextricably severed. However, there’s reason to believe links—both official and unofficial—will remain long after the last stakeholder tranche is vanquished.

This so-called perception issue dates back to December 2017, when news leaked that Aphria was contemplating selling their entire stake of Liberty Health Sciences (LHS). The move to cleanse its balance sheet was necessitated under pressure from the Toronto Stock Exchange, which warned that companies who operate in states where cannabis is legal were in breach of TSX listing requirements. The TMX Group’s stance, in a nutshell, was that direct American cannabis corporate ownership skirted exchange rules, and could prompt de-listing if not remedied.

Less than two months latter, Aphria heeded the warning by announcing a complete divestiture of LHS over time. Specifically, Aphria entered into a purchase and sale agreement to divest all shares of LHS not subject to Canadian Securities Exchange escrow requirements over the course of the next two and a half years (from the February 5th release date).

Currently, five equal tranches will be sold in 6-month intervals between now and July 2020. As per reports, 80% of all transferred shares will wind up in the hands of the Serruya family, while the remaining 20% is being purchased by an affiliate of Delavaco Capital.

Liberty Health Sciences CEO George Scorsis talks about strategy and operating within Canada and the U.S.

While the divestiture seems straight-forward on the face of it, some investors have taken this to mean that Aphria is expunging itself completely from LHS. In our view, such sentiment is likely misguided.

Aphria Remains Connected, In Various Capacities

One of Liberty Health Sciences biggest assets is the strength of their management team at the Board of Director level. Currently, two such members consist of Aphria CEO Vic Neufeld (Chairman of the Board), and Aphria VP of Infrastructure & Technology, John Cervini. Few sub-$300 million junior LPs can boast that kind of focused directorship.

Despite the coerced nature of the share divestiture, there’s been no indication that Mr. Neufeld plans on giving up his seat. While the TSX has authority to regulate jurisdictional corporate ownership in applicable cases, nothing in the exchange’s charter prevents a private citizen from participating on any Board he/she sees fit. So if Vic Neufeld and John Cervini elect to step down as directors with LHS, they will do so on individual terms. The industry contacts I’ve spoken with indicate no such move has been telegraphed.

Keep in mind that Aphria and Liberty Health Sciences have an entrenched operating history which extends beyond passive ownership. The two companies entered into a know-how license agreement in 2017 in which Aphria shares its methodologies and techniques with LHS on the subject of cannabis cultivation. This intellectual property agreement was the genesis of how both companies became bedfellows in the first place.

Given this fact, Liberty Health is presumably in prime position for re-investment by Aphria should cannabis’ legal status change in America. Why? Because LHS already ascribes to Aphria’s operating and cultivation methods already, making business integration a seamless endeavor. This extends to product licensing, with both companies having previously entered a trademark license agreement.

LHS was granted the right to use Aphria’s trademarks for the purposes of marketing, distributing and selling medical marijuana in the State of Florida.

Final Thoughts

We’re all familiar with the term “shotgun wedding”. But the divestiture between Aphria and LHS has been a genuine shotgun divorce. The parties are being separated through chartered dictate—not by their own volition.

With Aphria’s continued participation on the BOD level, parallels in operating structure and Aphria’s desire to enter American vertically-integrated cannabis markets ASAP, I believe re-marriage is possible when the regulatory environment corrects itself. Unless Vic Neufeld voluntarily leaves or is dismissed by LHS’ Board of Directors beforehand, the lines of communication and participation will remain open—irrespective of share divestiture.

That gives LHS the continued benefits of Big Cannabis directorship, and presumably, first dibs in amalgamation intentions when America finally enacts federal legalization frameworks.

Benjamin A. Smith

Benjamin A. Smith

Ben is a research analyst and capital markets professional with nearly 20 years of experience. His areas of expertise are broad-based, and include extensive knowledge of macro economics, stock/derivative trading, commodity complexes, cryptocurrencies and technical/quant analysis. He also maintains an particular affinity for U.S. politics and the macro-regulatory environment facing...
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