Green Growth Brands (CNSX:GGB) Takeover Bid: Alan Brochstein on What it Means for Aphria Inc (TSE:APHA)
420Investor and New Cannabis Ventures Founder Alan Brochstein, CFA dissects Green Growth Brands Ltd’s (CNSX:GGB) (OTCMKTS:GGBXF) plans for a hostile takeover of Aphria Inc (TSE:APHA) (NYSE:APHA) (FRA:10E). Brochstein addresses speculation about the nature of the proposal, highlighting that the Schottenstein family think very highly of Aphria, but indicates he’s not aware of a direct relationship between the two companies. Brochstein believes Aphria shareholders will reject the offer, as right now the Green Growth Brands proposal undervalues Aphria’s assets; however, as GGB’s operations in Nevada and Massachusetts ramp up, the bid might look more appealing. Brochstein mentions forthcoming legislation in Colorado and Michigan that will allow public companies to own cannabis operators and sees this as a catalyst for consolidation in the United States. He anticipates increased consolidation between MSOs and Canadian LPs as Canadian companies offer US operators the opportunity to grow internationally.
James West: Hey Alan, how are you doing today?
Alan Brochstein: Hey, great. Happy New Year, James.
James West: Happy New Year to you, as well! Alan, bit of the big news in the market right now is this Aphria-Green Growth Brands tie-up, and I just wanted to get your two cents on it in the context of it that there’s some suggestions that, you know, once again, there’s some questionable sort of things going on behind the scenes. People are suggesting that this is not in fact an arms-length hostile takeover but rather a pre-agreed sort of situation, as evidenced by some of the past relationships. What’s your take on all of this?
Alan Brochstein: Definitely entertainment in a pretty quiet market; we can probably all agree on that, probably. So look, full disclosure: Green Growth brands is a client of mine in New Cannabis Ventures. With that said, I haven’t talked to them, I don’t really have any insight; I’ve been observing them really from the outside, and just based on the things that I’ve heard and read historically about the company, I don’t see any reasons for concern about their intent. And I think their intent is good.
With that said, I certainly don’t understand the logic of the way they presented the offer, so that part I will agree; and calling it a $7.00 bid. But wit that said, what attracted me to the company months ago, before I had a commercial relationship with them, was the backing of the Schottenstein family, and I know that the Schottenstein family thinks very highly of Aphria. And I don’t think people really understand that so well, and I’ve been reading the press releases, and the last press release that came out on Monday evening was that the Schottensteins don’t have any direct investment in Aphria, so that may or may not – I mean, I guess that’s true, right?
So the – but they’re certainly very close and you know, for your listeners it should be clear the Schottensteins partnered with Aphria for that Ohio application, and then they kind of transferred it to Liberty, and yeah, and it was won, so there’s that small business – but Aphria, the only connection Aphria has to that from my understanding is through the option they have to buy back the Liberty Shares. So there’s no direct connection there.
So I don’t want to say that Green Growth Brands was trying to just do a publicity stunt; I think that that’s a nice by-product. Just my read of the way people have reacted, nobody knew who Green Growth Brands was, and you know, there’s now a whole bunch of new mult9state operators that have come public in the last three or four months, and you know, you and I have talked about it: a lot of them are down substantially. In fact, that ones gone up, even before they announced the deal, and I think the reason is, people kind of liked the story that they’re telling, which is you have the Schottenstein backing and you have a lot of retail experience.
And so, you know, I’m not going to say whether or not this is a good investment, because I don’t even really know. I honestly don’t. It’s not something that’s really gotten my attention from that perspective yet, but all these little connections, this is the way Canada is. I mean, you’re up there – you know the way it is. It’s not a big world up there, and so the fact that there’s some overlap between Green Acres and the Schottensteins and Aphria and Green Growth, to me, is not that big of a deal.
With all that said, I mean, I think, I don’t see anything terribly negative in what’s going on, but it doesn’t seem very realistic at this point to me that Aphria shareholders would vote for this merger .
James West: Right. And is that because, in your opinion, you concur with Aphria management’s statement that this is opportunistic and undervalues the company?
Alan Brochstein: Yeah, well, I would say, I don’t know if ultimately that will be correct, but I’d say that’s the right assessment right now. I think, you know, rightly, Aphria owes everybody an explanation, and the reason I say that is they said they’re going to issue this line-by-line rebuttal. And since then, all we’ve seen are these little press releases kind of justifying what they’re doing in Latin America, some extension into Paraguay, something today, you know, not very substantive to me. So you know, I think in the long run, that is correct. I think is aid to you a couple weeks ago that Canadian operations justify the valuation right now. With that said, you know, I’m kind of on the sidelines about Aphria right now. I think it’s a big drama.
A lot of people get drawn to drama like moths to a flame, and I’m going to sidestep this one and just let it kind of play out. I think a lot of people are bag-holders right now. We just went through a season that was quite phenomenal. You and I have bee talking about this, over the last month, people, come on, people have been recognizing tax losses left and right. So it’s left a lot of opportunities right now. So for all the people that want to wade into the drama, go for it. I just think there’s a lot of other things right now, that whether you’re north or south of the border, are more compelling.
But to your point, I think, I don’t know why in general this transaction of Aphria shareholders would ever vote on this. Now maybe over time, Green Growth Brands really starts to prove out what they’re doing; they have a bunch of licenses they just picked up in Nevada, they just started operations in Massachusetts, and so not to say that in the long run it wouldn’t make sense, but just based – I don’t think shareholders would approve of this right now.
James West: Right, right. I mean, from a Green Growth Brands shareholder’s perspective, it’s a very attractive proposition to get obviously one of the oldest and original ACMPR licensed producers who’s obviously got a fantastic production footprint in Canada, to have that as your initial supply source going into the branding phenomenon that is obviously Green Growth Brands’ core expertise – to me, I was, I first heard about it, I thought, of course, that makes perfect sense! That’s very exciting.
Alan Brochstein: It does make sense –
James West: No – I can’t wait to see how that plays out.
Alan Brochstein: So I think the bigger issue that people need to wrap their heads around – one of my big points for this year is, things have really changed over the last six months, and you know, a year ago, people in Canada wanted to be in the United States a little over a year ago. And then the parent of the Toronto Stock Exchange kind of put the kibosh on that, and we saw Aphria, unfortunately, have to divest of Liberty, and we’ve seen other companies kind of step back and just say ‘when we can, we’ll be in the United States, but for now, we value our TSX listing and we don’t want to give it up’.
So fast-forward to where we are now, and you know, the political environment in the United States has changed. We’ve seen a company, TerrAscend, entering the United States; we’ve seen Canopy Growth come really close to entering the United States, they’ve said they’re going to with the passage of the Farm Act. And I have to say: so there’s a huge value to having a New York Stock Exchange or a TSX listing, but with that said, the US market is really what these guys are after.
And I think after all these public deals that we’ve seen in the last few months, being on the CSE but being able to operate in the United States is a viable option, and you know, a lot of people say, Oh, Aphria should never do this, to be a CSE-listed company. Yeah, I bet if they could rewrite it, they would have just stayed on the CSE and been focused on the US. I expect to see, and I’m having conversations with a lot of people in Canada about this – we’re going to see LPs and MSOs in the United States hook up.
I don’t know that Aphria is the right one. I will drop this news: I know for a fact that there is an operator in the United States that put in a bid, or I don’t know if it’s an official bid, but tried to put in a bid for Aphria. And so I don’t think that’s the right one. I think Aphria is big, but if you’re a big MSO, here’s why it makes sense in general not to go after Aphria but in general: if you are operating in the United States, you can only operate in the United States; you can’t operate in the world, and as we know, north of the border, south of the border, across the oceans, things are happening.
And so if you want to be, in the long run, a big global player, yes, your whole company is at risk because you’re operating Federally illegally, but if you’re an MSO, you’re already in that boat. You can buy a Canadian LP and now have the world at your fingertips, whether we’re talking bout Germany or any of the other areas that are developing.
So I think things have changed a lot in the last year, and there’s a high likelihood, in my view, that we’ll see more LPs enter the United States or MSOs buy LPs in Canada. We’re going to see that integration.
James West: Yeah, you bet. So what are the other sort of big, macro-picture things that you see happening in the cannabis space this year, Alan, at least in the first part of this year?
Alan Brochstein: Well, so that’s not my biggest one. I think we’re going to see consolidation that I just described, but in the United States, I think a couple of big picture things that I’ve been sharing. Number one, I think that we just had a huge buying opportunity – and it’s not just in the US, but we saw all these deals come public, everybody dumped, dumped, dumped after they broke, and so I think that early in the year, we’re going to see a big rebound in some of the leading MSOs that have really followed. And I don’t even think you have to try too hard; just pick one or two or three, you don’t have to put a lot of thought into it, and you’re going to do well in that concept.
And I think also in the United States this year, we’re going to see some legislation, most likely in Colorado and maybe in Michigan as well – these are very different states; Colorado is the most mature, with big brands, big revenue, and then Michigan is up-and-coming. And in both those states, public companies cannot own the operators. But that is likely to change in both states this year, and it feeds into my other theme, which is, we’re going to see a lot more consolidation in the United States. And so that’s going to be a big theme, and I think it will get started pretty early.
James West: Mm-hmm. We’ve seen some weakness in some of the larger IPO companies that came to market in the last half of 2018 – Curaleaf comes to mind, Acreage Holdings, MedMen, of course, the flagship super-voting structure that everybody likes to hate. Do you think these super-voting structures are going to become accepted in 2019? Do you think that we’re going to see more of them, or do you think that they’re going to sort of go by the wayside as the managers realize that investors don’t like these things?
Alan Brochstein: So I think there’s a big misperception out there. I don’t think these companies do this because they want to, they do it because they have to. If you’re a US company and you want to go public in Canada, and the insiders control the company, the only way to get it done is with this voting structure, and it’s just a little loophole. So I get it; I’ve been focused on governance professionally for two decades, and it’s not something that you want to see, these structures, but there’s literally, from my understanding, no way around it. And so you had some of the early ones that came public, like CannaRoyalty, which is changing its name to Origin House, and of course iAnthus, that didn’t have this, but they didn’t have the insiders. These were both companies that were funded with investors; they weren’t big insider stakes.
But then you had GTI and MedMen were really the first ones to come public last year, and every other deal since then has been structured the same way, and it’s not because they’re all playing golf and laughing about how they can screw over, in the locker room, screwing over the investors; it’s the way it has to be done, from what I understand.
James West: Hmm. That’s the first I’ve heard of that, and if that’s the case, then I guess I’ll have to lay off the super-voting structure angle of attack. But –
Alan Brochstein: I think there’s other things to criticize, but I don’t think that’s one. But you’re right, it should be questioned, and people should understand that.
James West: Sure. Sure. Okay, so now looking at the rest of the world, ex of the United States and Canada, interesting that you point out the fact that if you are a US operator, you can’t operate anywhere else in the world. So that really kind of ring fences the potential of US companies that are listed on the CSE, doesn’t it? Because they can’t actually access Europe or Eurasia or the South Pacific.
Alan Brochstein: So if I’m understanding this correctly, if they buy a Canadian LP, then they can, and that’s why I think we’re going to see that.
James West: I see.
Alan Brochstein: I mean, I’ve talked to a lot of CEOs about this in the last couple of weeks, and in some cases, my idea was novel to them, but I was happy to learn that some of them kind of figured this out on their own as well.
James West: Well that’s a relief, Alan. What company out there can I ask you, excites you the most going into 2019?
Alan Brochstein: So I’m not going to give you a specific company, but I will say, I’ll give you a bunch of them: all these MSOs that just went public, without – there may be one or two I don’t care about, but the ones that went public from May until the end of the year – I think investors should look at those companies. Don’t worry too much about which one – I think most all of them will do well. So that’s the hint that I’ll give. There’s not one in particular.
James West: Right. Okay, Alan, well, again, thank you so much for your input. We’ll see you next week. Have a great rest of your day.
Alan Brochstein: All right, sounds good. Take care, James.
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