In what should come as no surprise, Aphria Inc (TSX:APHA)(NYSE:APHA) formally responded to and rejected a takeover bid by U.S. cannabis company Green Growth Brands Inc. (CSE:GGB) (GGBXF). The all-stock deal involved an exchange of shares under which Aphria investors would receive 1.5714 shares of Green Growth’s stock. And especially given the recent climb the stock has been on, rising around 80% since the start of the year, it seems like a forgone conclusion that shareholders would outright reject the proposed deal.
It’s important to note that shareholders have not voted on the deal, only that The Company’s board have issued guidance on the matter.
As of Tuesday’s close, Green Growth’s stock was only $5.87, nowhere near the $14.02 that Aphria was trading at. Even at two shares of Green Growth’s stock, it wouldn’t be near fair value.
However, as if price wasn’t enough of a reason, Aphria pulled no punches, stating that the hostile bid:
- Would result in Aphria shareholders effectively giving GGB shareholders a 36% interest in Aphria in exchange for shares in a company with limited operations or other experience in the cannabis industry.
- Does not account for Aphria’s bright outlook, either as an independent company or in partnership with a strategic partner, which offers Aphria shareholders substantial value creation.
Although harsh, it’s not unwarranted criticism for a company that I had a hard time believing would think Aphria shareholders would have taken the deal in the first place. Aphria was in the midst of a big selloff and unless investors believed that the stock was headed nowhere but down, there’s little reason to have expected that offer would have garnered any serious consideration.
Moving to the CSE would have big consequences
As Aphria’s Board notes in the release, one of big consequences of taking the bid would be delisting from the TSX and NYSE. It would be a backwards move any way you look at it. Over the past year, we’ve seen many cannabis companies look to list on the major U.S. exchanges, and to throw that away for a fairly unproven company would simply be mind boggling. With a much smaller pool of investors on the Canadian Securities Exchange, it would also hurt Aphria’s ability to raise capital which could have a devastating impact on its ability to achieve significant growth.
Still waiting for a partner
The deal with Green Growth is not likely to go through, but it’s likely Aphria is still looking for a company from another industry to partner up with. Many cannabis stocks have already secured deals with some big names in other industries, including Constellation Brands, Molson Coors Canada, and Altria. The latter, was rumoured to be in talks with Aphria only to eventually invest in Cronos Group Inc.
With the edibles market in Canada expected to be legalized later this year, it’s going to be paramount for Aphria to find a company that has experience in the industry or that has deep pockets that can help fund the growth. The danger for Aphria is falling behind and going at it alone while its peers have a leg up. Overall, I’d be surprised if Aphria doesn’t have a big deal to announce over the next few months.