Cannabis CliffsNotes: GGB’s Strong Close, Aphria PT Reached, Village Farms

Benjamin A. Smith

Below are the companies — Green Growth BrandsAphria Inc. and Village Farms International, Inc..— which have associated stories and narratives we’re focusing on for tomorrow.

Green Growth Brands

For the better part of today’s session, it looked like the loose trading correlation between itself and Aphria was severed. Odd, considering Green Growth Brands plans on issuing a formal takeover offer for Aphria as soon as Tuesday. The previously-evident loose merger arbitrage completely broke down for most of the day, leaving some wondering what had happened.

Of course, the merger arbitrage taking place was obviously far from ironclad. As the chart below indicates, several occasions have occurred over the past 10 sessions where the GGB/APHA price disconnect has been pronounced. Aphria has already rejected GGB’s $11/share all share bid, in which a $300M concurrent financing was proposed to boost GGB’s share price and validate the proposed exchange ratio of 1.5714 common shares for each APHA share. Many in the investment community remain skeptical of the viability of GGB’s offer, tepid acquisition price, and logistics.

GGB – APHA Loose Correlation – 10 Day Period

Nonetheless, a loose price correlation over the past two weeks has remained intact. Despite this weekend’s news that an upgraded bid was imminent, the arb gap between suitor and LP had completely closed by around 3:00 pm EST.

But then something happened—Green Growth Brands found it’s footing and surged into the close. Between 3:15-4:00 pm, GGB surged almost 10% on easily the session’s strongest volume. Previous to that, the stock had been vacillating around break-even for most of the day—even after Aphria caught fire.

Is there a takeaway from all of this? It’s hard to say. With Aphria’s final hour HOD surge, the previously-proposed exchange ratio bid was getting away from GGB a little bit, perhaps prompting buyers to re-correlate the ratio. That would perhaps make sense if a higher offer is coming, making a potential acquisition more attractive. The move could also be attributed to the randomness of markets—who really knows.

But if mainstream reports are accurate, investors will find out soon whether GGB’s opening salvo will be followed by a more sale-able proposal; one which is both stronger on synergistic details and term.

Aphria Inc.

Is seems that CIBC analyst John Zamparo may have set the bar a tad low when he initiated shares of APHA at Neutral with a $10 price target on January 18th. Just one session after that fateful call, APHA broke that projection by reaching $10.06/share—finishing eight cents under the 10-dollar mark.

As indication that perceived indiscretions still stalk the Leamington-based LP, Zamparo cited corporate governance and capital allocation as reasons some investors might keep at arm’s length. Of course, that’s in reference to the Hindenburg affair, where accusations of trumped-up asset purchases ran rampant. Although most of this ‘research’ has been successfully corralled by company supporters, it’s interesting that Zamparo’s lowball price target still references this unfortunate past. Apparently, not even Aphria’s Special Committee to review corporate governance or CEO Vic Neufeld’s progressive departure is enough to assuage Zamparo in this instance.

Either way, it’s likely a case whether a Big Six analyst is playing it safe. Until actual committee findings and changes are implemented (beyond Vic), taking a cautious approach is the safe play. It also gives CIBC much maneuverability to raise their price target later on, giving APHA a nice boost when investors least expect.

Village Farms

This morning, Village Farms International (VFF) announced that it has filed an application to list its common shares on NASDAQ Capital Market. Upon commencement of trading—which will be announced via press release soon—Village Farms intends to voluntarily de-list its common shares from the OTCQX, thus turning the page in its U.S. listing history. In response, VFF’s common shares surged, rising $1.04 to $6.14 (↑20.39%), to its best levels in two months—on 3-month volume highs.

As today’s 20-percent-plus move in Village Farms (VFF) today shows, sometimes, it’s just a matter of timing. Capitalizing on the recent sector sentiment upswing, VFF rose sharply and kept most of its gains. This has not been present in recent up-listing announcements where such news occurred in downtrodden environments.

For example, on October 18th, Aurora Cannabis only rose $0.08 after it announced its NYSE listing date for the following Tuesday. On October 30, 2018, Aphria rose $0.54 or ↑4.22% on the day it announced NYSE approval, but that was modest considering the stock had dropped ↓34.34% over the previous seven sessions. Of course, both of these events occurred in a post-legalization bear market which buried all good sector news.

But isn’t that really the point? VFF’s ability to foment a bullish surge had just as much to do with buoyant sector sentiment than the news itself. With investor confidence elevated and sellers slinking away, buyers had the green light to run roughshod over the ask. Had this news occurred about a month earlier, I think the outcome would have been very different.

As the old saying goes: “it’s better to be lucky than good, and good to be lucky”. It appears Village Farms was both on its NASDAQ application timing.

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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