In an anti-climatic memorandum to Aphria Inc (TSE:APH) (NYSE:APHA) (FRA:10E) shareholders, Green Growth Brands much-ballyhooed formal offer arrived with a thud. This status quo will do little to shift sentiment on an offer that was generally disfavored by investors and company management alike.
After the bell on Tuesday, Green Growth Brands (GGB) announced that it will formally commence its offer to acquire all issued and outstanding common shares of Aphria. GGB further enlisted All Js Greenspace LLC—a firm with close ties to the Shottenstein family—to subscribe for and purchase up to $150 million of Green Growth shares as a backstop to the company’s previously proposed $300 million equity financing to boost the sale-able value of GGB shares. A notice and advertisement of the offer will appear in two prominent Canadian news publications on January 23rd, with circulars being mailed to Aphria shareholders in the coming days.
Although 24 days have elapsed between the initial offer and the current iteration, financial tenets remain unchanged. No cash component to the all-share deal was offered, nor was the exchange ratio raised. The offer provides Aphria shareholders with an identical 1.5714 GGB common shares for each APHA share outstanding—despite the fact APHA has gained ↑24.57% since December 27, 2018.
And lest you believe Green Growth’s bid is responsible for Aphria’s good fortune, consider that the Horizons Marijuana Life Sciences Index ETF (HMMJ) has corresponding risen ↑27.98% since December 27th; meaning APHA has actually under-performed its peers during this period.
Reasons to Accept the Offer Remain Unclear
Another reason why the acquisition bid misses the mark are the unclear advantages Green Growth brings to the pro forma entity. Similar to the original proposal, GGB fails to clarify how stringent Cannabis Act marketing restrictions—both domestically and abroad—can be disarmed to benefit of the acquired. As it currently stands:
“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 a significant landmine shareholders of both companies should want answered. In essence, how does a brand-centric company benefit Aphria’s current asset base under the current rules? Obviously, none of Aphria’s future 250,000kg/year production capacity can be integrated down south, meaning anything not exported internationally will be branded and consumed domestically. Last we checked, GGB had no specific food (edibles) manufacturing and distribution prestige.
Ultimately, great unions are born when complimentary synergies exploit each company’s strengths to make the whole stronger. But from my standpoint, those aspects still remain unclear and inappropriately communicated. The presser regurgitated many of the previous bid’s buzzwords regarding how the combined entity would become a “Preeminent U.S. Consolidator” and “Unparalleled North American Player”, without providing specifics on the ‘hows’ and ‘whys’. And that, in my opinion, could only have been tackled by taking a holistic view of Canada’s existing domestic operating environment, rather than presenting ambiguous and boilerplate corporate-speak.
Also left unsaid is why Aphria would relinquish significant control of the entirety of its portfolio assets just to acquire relatively modest Total Addressable Market (TAM) assets down south. Aphria already has an existing arrangement with Liberty Health Sciences to stake minority control when cannabis becomes de-scheduled over the next few years. However strong GGB’s management team is purported to be, Aphria’s production capacity isn’t moving southbound until this event transpires. When it does, the company has an existing and willing partner waiting to re-integrate itself on a material basis.
From my perspective, Green Growth Brands formal offer is an opportunistic stab into the unknown. While it won’t move the needle with investors, there’s always the possibility significant amounts of tendered APHA shares crossover should Aphria experience another deep shock between now and May 9, 2019—the acquisition bid expiry date. Given the company’s colorful history in that regard, such an event cannot be ruled out.
Outside of the unforeseen, it’s hard to see how GGB improved its offer standing. No sweetners were added, nor we’re perceived synergies clarified. Already, Aphria has implored investors not to tender shares, calling the proposal “substantially identical to their earlier hostile proposal on December 27, 2018.” Essentially, investors received the same re-gifted present rejected at last Christmas—simply re-packaged in shiny new wrapping paper and a pretty bow.
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