GGB Takeover Bid of Aphria Inc (TSE:APHA) Makes Conflicting Sense

Benjamin A. Smith
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In a remarkable after-the-bell event yesterday, Green Growth Brands Ltd. announced a takeover bid for Tier-1 Canadian cannabis LP Aphria Inc (TSE:APHA) (NYSE:APHA) (FRA:10E). While the takeover maneuver isn’t particular unforeseen to anybody following the company, Aphria’s suitor sure was. We take an in-depth look at the proposed deal as it currently stands.

Mere weeks after listing on the Canadian Securities Exchange via reverse takeover (RTO) of Xanthic Biopharma Inc., Green Growth Brands (GGB) is ready to deal. The company went all-in by announcing its intention to purchase all of the issued and outstanding common shares of Aphria which it does not already own. It will provide Aphria shareholders with 1.5714 GGB common shares for every APHA share in circulation. The proposed deal represents a ↑45.5% premium over Aphria’s December 24th closing price on the Toronto Stock Exchange, and 46.0% over the stock’s 10-day volume weighted average price (VWAP).

Despite the fact that Green Growth Brands closed at C$4.98/share, the offer values Aphria at approximately C$2.8 billion (US$2.1 billion), based on a valuation of C$7.00 per GGB share. This will be achieved via brokered financing of C$300 million—raising GGB’s listing value—designed to illustrate confidence in the offer value and fund future business growth of the combined entity.

Certainly, the primary backers (and associates) of Green Growth Brands—Ohio’s Schottenstein family—possess the liquidity to secure the financing. Apparent associations between some members of the parties involved (beyond the purview of this article) suggest a conducive environment to strike a deal.

But aside from the fact that a deal could conceivably happen, does it actually make sense? From where I sit, that notion is a mixed bag.

Does a Cross Border Branding-Centric Operator Make Sense?

Green Growth Brands is obviously top-heavy into branding. It’s in their name, splashed prominently on their website, and lead by a CEO who played key roles in establishing Tier-1 retail brands (Victoria Secret, American Eagle, DSW and more).  The problem is, Canada may be a poor venue for U.S. branding-centric operators at the present time—at least as it pertains to retail sales and accessories.

In order to obtain a majority vote needed to pass Bill C-45, law makers agreed to treat cannabis as clinically as possible. No more is this evident by the drab packaging of cannabis containers, which reads like a circular version of a cigarette pack.

While both legal U.S. states and Canada share similar restrictions as it pertains to endorsements, sale-ability to young persons, lifestyle advertising and more, the Cannabis Act further prohibits promotion of cannabis brands using foreign media.

“It is prohibited to promote … cannabis, a cannabis accessory, a service related to cannabis or a brand element of any of those things in a publication that is published outside Canada, a broadcast that originates outside Canada or any other communication that originates outside Canada.”

That’s an impediment for specialized branding operators looking to position themselves in both countries. The Canadian government has made it a priority to ensure LPs cannot evade the Act’s advertising and promotion restrictions by promoting products abroad. As such, Green Growth’s foray into Canada has the potential to crimp how the company markets its cannabis offerings down south. Running afoul could jeopardize its licensing in Canada, and open up requisite parties to liability.

Perhaps things will change. Perhaps they’ll find a way to maneuver around the restrictions. But wouldn’t that diminish Green Growth’s most valuable and provable skill—fostering strong brands?

The Unorthodox Logistics of the Deal

Setting aside the validity of the deal’s proposed synergies, underlying logistics may not align.

For starters is Green Growth’s limited operating history—particularly within Canada. As most of Aphria’s production capacity emanates domestically—and shall remain within Canada’s borders—that’s a consideration for investors. The company’s RTO with Xanthic isn’t even two months old, so it would be a case where a junior newcomer wrestled control one of Canada’s “Big 3” operators on their own turf. That seems like a bit of a stretch.

Second is the potential lack of market support at Green Growth’s proposed C$7/share offering. The stock has already moved ↑60.64% over the past six sessions in an exceedingly weak macro/sector environment. Since this is an all-stock transaction, there’s tremendous uncertainly whether the proposed price and closing price can stay tethered to each other. If not, this may be a non-starter with shareholders before it gets off the ground.

Furthermore,  I can’t recall a bought deal transaction that closed at significant premium (40%) in order to purchase another company. This is less problematic if the Schottenstein family is fronting much of the money. But still, it’s an unusual situation in which precedent is lacking in the sector.

Finally, we ask whether Aphria’s core strengths don’t favor a Big Beverage/Tobacco marriage over a branding-centric one. We assume that vision was the driving force behind Aphria’s $55 million State-of-the-Art Extraction Centre, announced in June. While that could jive well with future GGB’s extraction intentions, it somehow feels that this project was built with Big Beverage in mind.

If GGB was looking for someone to help build-out its CBD concentrate/extract product line, wouldn’t it make more sense to partner-up down south? Recent Farm Bill passage has opened the door for industrial hemp production in the U.S., where grow environments are cheaper and more hospitable that cultivating indoors (or outdoor via Canada’s shorter planting cycles).

If gaining access to cheap LATAM soil is part of GGB’s plan, it surely wouldn’t need to invest $2.8 billion to make that happen.

Final Thoughts

Perhaps I’m looking at this deal the wrong way. Perhaps Aphria is exactly what Green Growth Brands needs to launch itself onto the global scene. Certainly, there’s no American MSO which could match the combined entity’s global reach should everything come together. I’ll be the first to concede tunnel vision if it does.

But the dynamics of this particular deal don’t add up to me—at least not initially. Regardless, the announcement is stellar news for Aphria on several fronts.

First, it could draw remaining CPG acquirers into the mix; those who have undoubtedly kicked Aphria’s tires at these depressed prices. GGB’s proposal establishes floor expectations of what a winning premium could require. The company also further distances itself from Hindenburg’s grating accusations, which has stubbornly remained omnipresent. Few people will be focusing on that grenade anymore, as merger mania overshadows all.

Whatever happens between APHA and GGB, we get the sense that Aphria’s time is coming. Canopy Growth, Hexo Corp., Cronos Group and Tilray have all inked major CPG partnerships recently, and Aphria is clearly positioned for such a calling. The only question now was whether GGB’s opening salvo was the one, or just a stalking-horse bid to attract more entrants into the race.

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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