Aphria Inc Unjustly Hit By Well Known Mainstream News Outlet

Benjamin A. Smith
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It seems one mainstream Canadian news outlet can’t help themselves when it comes to Aphria Inc (TSE:APH) (OTCMKTS:APHQF) (FRA:10E). The Globe & Mail—one of Canada’s oldest and most respected daily news purveyors—has published additional barbs against the Leamington-based cannabis LP. We expand on the dastardly details, which in my view, hit way below the belt.

The event in question comes way of hyper-editorialized content, published August 19th, by Andrew Willis. In an article titled Cannabis companies face heartbreak in takeover dance (alternative link), Willis leads by claiming that, “A number of marijuana company CEOs felt jilted” in the wake of Molson Coors Brewing Co. decision to joint venture with Hydropothecary Corp. One paragraph later, it goes on to single out Aphria saying, “By all accounts, disappointment was particularly acute in the head office of Aphria Corp.”

Really? Because supposition aside, it seems that Aphria—and all competing suitors for that matter—may be experiencing more relief than “jilted” sentiments these days. At least, that’s what the market has clearly expressed in the days following the announcement.

After an initial burst of enthusiasm which sent HEXO soaring ↑11.03% in the Molson Coors deal aftermath, momentum died down quickly. HEXO proceeded to display relative weakness over the next several days, closing below the pre-deal close only seven days after it was announced. While the company did what they must to ink the transaction, the terms were certainly more tepid than the buy-in Canopy Growth Corp. received from Constellation Brands Inc. nine months earlier. Bear market or not, the market clearly expressed that HEXO’s deal was neither transformational, nor particular inspiring—which were the exact views we opined at the time.

Furthermore, does Mr. Willis have any actual evidence that Aphria head office was indeed “jilted”? According to dictionary.com, to be jilted is “to reject or cast aside, especially abruptly or unfeelingly”. But in the aftermath of the deal, Aphria CEO Vic Neufeld seemed anything but:

It’s not what happened, it’s what didn’t happen… And what didn’t happen is a major global beer brand making a real big statement in this space… There was no equity investment, there’s no injection of gray matter… Forget the name Hydropothecary; the concept was not as transformational as was thought.

Sour grapes? Possibly. But it sure seems like Aphria either decided to pass, or was unwilling to acquiesce to an arguably one-sided deal. Either way, disappointment should hardly be confused with scorn.

The Globe & Mail Goes Low

The real body blow, however, comes near the end of the article when the author opines on the Nuuvera Inc. acquisition Aphria made in January. After slagging much of the cannabis industry by insinuating it is run by unscrupulous snake oil salesmen (re:”and feature long-time backers from the same crowd of stock promoters that gave junior mining companies their checkered reputation.”), Willis chimes-in with this beauty:

Reputation is also an issue for companies such as Aphria, where senior executives made headlines in March by popping up as significant personal shareholders in a company they targeted in a takeover, Nuuvera Inc. That’s the kind of deal-making that raises eyebrows at image-conscious global companies.

This missive is in reference to the fact that four executives and three directors of Aphria failed to disclose stock positions held in Nuuvera at the time the acquisition was announced. These individuals had acquired a total of 900,000 shares in Nuuvera for $1 each during a private financing round held last August. Upon the deal closure, the original $900,000 investment turned into a near $5 million windfall for the aforementioned Aphria insiders. Although somewhat eye-opening from a superficial perspective, a more nuanced view of the facts clearly indicates that Aphria insiders did nothing wrong.

For starters, Aphria insiders were under no legal obligation to disclose such information, as they were neither material (a combined 0.9 per cent of Nuuvera stock was procured on a fully diluted basis) and were held in escrow to prevent selling into the open market. The Nuuvera shares would later be converted to Aphria stock, and subject to blackout trading restrictions.

The transaction was later reviewed by the Ontario Securities Commission, who found nothing wrong. According to the OSC, the takeover of Nuuvera was deemed an arms-length transaction, and as such, “would typically not be disclosure of shares held by insiders of the acquirer,” stated organizational spokeswoman Kirsten French.

Furthermore, Aphria made sure the Nuuvera acquisition was transparent throughout. The board appointed a special committee of independent directors, which solicited a fairness opinion from Cormark Securities Inc. and outside counsel to advise on the adequacy of the deal. The end result: The board received the special committee’s unanimous blessing to approve the deal—despite the personal interests involved. Aphria shareholders would later grant the same tacit approval.

In any event, the accusations of impropriety never passed muster from a logical point of view. Why would Vic Neufeld, CFO Carl Merton and others, jeopardize their much larger Aphria holdings over a measly low six-figure investment ($900,000 split seven ways)? It’s simply not credible that Tier-1 insiders would collude to put tens of millions of share capital and warrants on the line in order to profiteer in such a minute manner.

Final Thoughts

The fact that the Globe & Mail would raise the specter of Nuuvera impropriety—the same boogeyman it helped foster back in March—is beyond the pale. Outside of some brief rumblings at the time, time has shown that Aphria acted completely above-board in all aspects of that transaction. Most certainly, reputation is not also an issue for companies such as Aphria, which is generally considered one of the better-run cannabis companies in North America.

Just as equally, the insinuation that Aphria’s “kind of deal-making raises eyebrows” with image-conscious global firms is the kind of sloppy conclusion that’s cringe-worthy at best. Certainly, Molson Coors would have had no qualms engaging had Aphria acquiesced to their intractable terms. As it were, they are probably better off foregoing this particular opportunity altogether.

In the end, the article is yet another in the long line of cannabis industry hit pieces the Globe & Mail is accustomed to writing. And there’s nothing wrong with that, when concentrated on the sector at-large. But targeting an individual company by insinuating past wrongdoing is something entirely different, and we hope this slanderous innuendo is relegated to the dustbin of public opinion it deserves.

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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