Cannabis CliffsNotes: Green Growth Brands Exchange Ratio Widens, Online Sales, Harvest One
Green Growth Brands
It appears the exchange ratio spread between Green Growth Brands (GGB) and Aphria has broken down. Over the past three sessions, the sloppy tethering between both stocks has given way markedly.
As per Green Growth Brands formal offer on January 21st, Aphria shareholders would receive 1.5714 common shares of GGB for each APHA share owned. With a closing price of $5.99 at the time, that valued APHA stock at around $9.41/share. The all-share/no cash commitment has not been received favorably by Aphria shareholders—even with a proposed $300 million equity financing to engineer GGB’s share price to $7.00, thus valuing Aphria at $11.00 based on a trumped-up exchange ratio. Many investors feel the offer is financially insufficient.
Fortunately for opponents of the deal, the market may be siding with them. As we can see below, the exchange ratio has broken down considerably since Friday. Today marked the third consecutive session where prices showed pronounced divergence throughout. Previously, the divergence was only sporadic, usually normalizing within a calendar session. Currently, Green Growth Brands offer—excluding unorthodox and tricky concurrent financing plans—values APHA on an exchange ratio basis at just $7.92/share.
No credible merge/arb spread would ever dissolve that wide. Fairly certain something is amiss with the $GGB – $APHA bid. That's ↓17% in less than 3 sessions.#greengrowthbrands #aphria pic.twitter.com/s6VlMyU7ab
— Benjamin A. Smith (@BenjaminA_Smith) January 29, 2019
Although anything can happen between now and the deal’s closing date on May 9th, it doesn’t appear the market (participants, merger arbitrageurs) is giving Green Growth Brands offer much weight. Neither does it appear the market is holding its breath that a higher bid is coming, which makes sense considering GGB’s informal and former offers afforded a similar valuation.
Midas Letter will continue monitoring the situation and issue further updates as events warrant.
New Brunswick Sales
It’s a small sample size, but one province is demonstrating just how critical the lack of brick & mortar presence—particularly in Ontario and British Columbia—is hurting overall cannabis sales.
On January 25th, it was reported that although New Brunswick was touting overall sales of $8 million in the first quarter of legalization, online sales accounted for only $400,000 of aggregate revenue. This, despite a province which has never been offline since opening on October 17th. As Lift & Co.‘s Nick Pateras puts it:
Cannabis NB's (unaudited) numbers from Friday show just 4.7% of its sales came through its online store. This is a province that had all its doors open on time, so notwithstanding the novelty of visiting a store, this AGAIN underscores the role brick-and-mortar has to play.
— Nick Pateras (@Nick_Pateras) January 26, 2019
We completely agree with that statement. As we’ve previously argued in regards to the Ontario government’s decision to stagger sales channels in August, “Retail cannabis sales have already been delayed until April 2019, acting to elongate the revenue cycle in a material way.” Throw in system-wide supply chain issues and dozens of municipalities opting-out from retail cannabis consideration countrywide, there’s no question legal cannabis sales are running well below potential. Not only do overall domestic sales numbers bear this out, New Brunswick has just provided hard evidence of the degree.
We expect the market to derive increased market share as supply and retail roll-out harmonizes. But as of now, 77 of 414 municipalities in Canada’s most populous province have opted out, raising questions of how depressed cannabis sales potential in Ontario will be in 2019.
Flying-in under the radar, Harvest One Cannabis Inc. is among the best performing Canadian LPs—in any tier—so far in 2019. Since the start of January, HVT has risen ↑87.49% in controlled and stealthy fashion.
Despite a benign news cycle, investors continue to bid-up the stock. This is in-line with most Canadian juniors so far in 2019, which have generally trended upward. The big question going forward is whether Harvest One—and the rest of the junior complex—can hold onto gains during the inevitable market downturn. The junior Canadian cannabis market, in particular, has a history of bleeding out for prolonged stretches.
Case in point: Harvest One declined ↓69.53% on a closing basis in 2018, and an astounding ↓82.27% on a peak-to-trough basis. Except for a moderate period of “strength” roughly spanning a period between mid-August deal and October 17th legalization, price action had been straight down. Even in the aforementioned period, HVT was materially under-performing its peers.
We wish the company luck in 2019 as the company looks to reverse its fortunes. Anecdotally speaking, the company’s newish former Loblaws COO Grant Froese appears to have the company on a right track.
Midas Letter will have further coverage as events warrant.
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