Canadian cannabis producer Aphria (APHA) on Friday said that a hostile takeover plan from U.S.-based Green Growth Brands announced a day earlier "significantly undervalues" the company. Still, Aphria stock jumped early Friday while most other marijuana stocks edged higher.
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But as that ascent continued into the afternoon, more questions surfaced about Green Growth's ties to the company and how viable the offer was.
Green Growth's plans to launch the takeover effort, an all-stock bid that valued Aphria at $2.1 billion, marked the latest plot twist for Canadian cannabis this month. Aphria stock crashed early this month after two short-sellers — Hindenburg Research and Quintessential Capital — accused the company of shady self-dealing and called it a "black hole" and "a shell game with a cannabis business on the side."
Hindenburg on Friday called the intended bid a "desperate attempt to manufacture the appearance of demand." The short-seller also cited what it alleged were "numerous signs of Aphria related-party influence" in the deal.
Ohio-based Green Growth Brands, a company backed by a family that made its money in retail, said Thursday that before it made its takeover plans public, it engaged Aphria's board to "negotiate a friendly business combination."
But Aphria, on Friday, said that offer was made that morning. Green Growth Brands, it said, made the offer public less than six hours later.
"The Board believes that GGB is attempting to acquire the company through a highly conditional offer at a significant discount to its current and future value," the company said in a statement on Friday.
Green Growth said Thursday it would pony up 11 Canadian dollars per share for Aphria, a 45.5% premium to the Canadian company's closing price on Dec. 24. The offer would give Aphria shareholders 1.5714 common shares of Green Growth for each share of Aphria. Green Growth also said it expected to compete brokered financing of 400 million Canadian dollars at a price per share of 7 Canadian dollars as part of that offer.
Aphria on Friday said that based on the 1.5714 figure and the 20-day volume-weighted average price of Green Growth's stock, the bid "would be approximately 23% below" Aphria's stock price over that period.
Aphria: 'Quite Risky' Takeover Bid
"Aphria shareholders should be aware that the value of GGB's per-share offer is based on a hypothetical valuation of its own shares, with no relation to the current price," Aphria said. It added that the offer is "quite risky" due to Green Growth's proposed brokered financing to complete the deal.
"While we appreciate GGB's interest in the value we have created at Aphria and our significant growth prospects, their proposal falls short of rewarding our shareholders for participating in such a transaction," Irwin Simon, Aphria's new independent chair, said in a statement.
Aphria appointed Simon to that title on Thursday, replacing CEO Vic Neufeld. Simon is the founder and former CEO of Hain Celestial Group (HAIN).
Hindenburg questioned the timing of that move. But it appeared to placate at least one analyst.
GMP Securities analyst Martin Landry — who placed his rating on Aphria stock under review after the short-sellers' allegations "impacted management's credibility" — updated his rating to Buy.
"We were looking for changes at the BOD to improve governance and yesterday, Aphria announced the appointment of Irwin D. Simon as Chair of the BOD, effective immediately," he said in a research note.
But he said the offer from Green Growth appeared unrealistic, given the company's size.
"GGB has not made a formal offer yet but with a market capitalization less than half the size of Aphria, GGB's potential offer looks ambitious," he said in a research note.
Green Growth said a merger with Aphria would create an industry player with operations in both the U.S. and Canada. Green Growth Brands, whose official name is Xanthic Biopharma, is based in Columbus, Ohio. It was formed on Feb. 14. The company went public on the Canadian Securities Exchange in November.
Green Growth recorded around $1.8 million in sales in its most recent quarter, ended Sept. 30, with a loss of roughly $516,000.
Revenue from that period reflected sales from a Las Vegas-based cannabis producer and retailer, called Nevada Organic Remedies, Green Growth said in a filing. Green Growth acquired Nevada Organic in September.
Green Growth has other licenses in Nevada. The company this month also announced plans to acquire a company that will provide it with a medical dispensary license in Northampton, Mass. That deal also gives Green Growth the right to acquire property to develop a cultivation facility there.
Green Growth, in a filing last month, said it was in a "startup phase" and planned to expand its retail business over the next 12 months. It said its strategy would be to offer a "premium cannabinoid brand offering scientifically proven relief through easy, innovative, and contemporary non-combustible methods."
Green Growth Brands also comes with the backing of the Schottenstein family, a family that made its money in the retail business. The Schottenstein family is Green Growth's biggest shareholder. Green Growth CEO Peter Horvath has experience as an executive at American Eagle Outfitters (AEO), where Jay Schottenstein is CEO.
"We believe our offer will create value for both Aphria and Green Growth shareholders," Horvath said in a statement on Thursday. "We are confident that the significant premium we are offering and the opportunity to participate in the growth of a stronger, combined company are so compelling that we are taking our offer directly to Aphria's shareholders."
Such a deal would mark the latest cross-border tie-up in the cannabis industry. TILT Holdings recently completed a four-way merger that combined companies in the U.S. and Canada.
Aphria Stock, Most Marijuana Stocks Rally
Aphria stock finished 12% higher 6.26 on the stock market today after soaring as much as 26% late Thursday.
Among other marijuana stocks, Cronos Group (CRON) closed up 1%. Canopy Growth (CGC) was roughly flat after-hours, after rising 2% during the day. Aurora Cannabis (ACB) edged 0.2% lower, after closing the regular trading session up 2.6%. Tilray (TLRY) picked up 5.7%.
The news marks the latest in a hectic ride lower, and then higher, for Aphria stock.
The short-sellers — Quintessential Capital and Hindenburg Research — alleged this month that some acquisitions Aphria made in Latin America and the Caribbean were orchestrated to enrich company insiders.
The short-sellers claimed that Aphria overpaid for essentially worthless assets in Latin America and Jamaica — among them vacant or nearly vacant buildings; a dispensary whose address they said they couldn't verify — that were passed through to Aphria by another company where its CEO and others allegedly held "key insider roles."
Aphria called the report "false and defamatory." It then published details of its Latin American operations intended to show they were operational and not, in fact, worthless. Aphria said the companies in question were given due diligence before they were acquired.
The company also appointed a committee to review the acquisitions, while saying it stood by the purchases. Aphria's CEO, Vic Neufeld, told a Canadian newspaper the company would publish a line-by-line rebuttal to the allegations. The company then pushed that response back, saying it would wait for the committee's review to end before addressing the short-sellers.
Aphria stock also rebounded after supporters stepped in and shot back at the allegations. They said that finding the dispensary was a matter of walking a few feet further.
Green Growth, Aphria Ties
Aphria has partnered with the Schottensteins before, via a company called Schottenstein Aphria. As the Dayton Daily News reported last year, that company was one of dozens trying to acquire a license to cultivate medical marijuana in Ohio.
Hindenburg on Friday said that one of Green Growth Brands' biggest shareholders, GA Opportunities Corp., is overseen by investment fund Green Acre Capital, whose advisory board members include Neufeld.
Aphria, in a filing in October, said it recently "transferred assets" worth around 30.5 million Canadian dollars to GA Opportunities. Aphria also said it had agreed to invest 2 million and 15 million Canadian dollars, respectively, in two Green Acre Capital funds.
Hindenburg also said that one of Green Growth's former directors, Shawn Dym, was also a director for Aphria.
Aphria, in its response Friday, said it held a "passive investment" in one of the Green Acre funds. The cannabis producer noted that the fund had "invested in numerous emerging cannabis companies," including Green Growth Brands.
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