Green Growth Launches $1.8 Billion Hostile Offer for Aphria

(Bloomberg) -- Green Growth Brands Inc. faces an uphill battle in its unsolicited bid for Aphria Inc., which reiterated that the C$2.4 billion ($1.8 billion) offer undervalues Canada’s fifth-biggest cannabis producer by market value.

Aphria advised its shareholders to take no action on the formal offer presented late Tuesday, with terms identical to an informal proposal made public last month. Columbus, Ohio-based Green Growth offered 1.5714 shares per Aphria share and plans to complete a third-party equity financing of C$300 million at C$7 a share.

“We are determined to protect Aphria shareholders from opportunistic offers that fail to reflect the substantial value and growth prospects we have built at Aphria,” the company said in a statement.

If Green Growth is successful, it will mark the first large cross-border takeover in the cannabis industry. Canada legalized recreational pot in October and while several U.S. states allow medical or recreational use of the drug, it remains banned at the federal level. Legal consumer spending on cannabis is expected to reach $5.9 billion in Canada and about $22 billion in the U.S. by 2022, according to Arcview Market Research and BDS Analytics.

Schottenstein Family

Based on Wednesday prices, the offer is worth about C$9.40 a share, below Aphria’s current price of C$9.58. If Green Growth hits the $7 mark with the equity financing, the offer would be worth C$11 to Aphria shareholders.

Green Growth said Tuesday that shareholder All Js Greenspace LLC has agreed to purchase up to C$150 million shares as a backstop to the financing. All Js is backed by the retail fortune of Ohio’s Schottenstein family, which are part owners of the shoe retailer DSW Inc. and teen clothing chain American Eagle outfitters. All Js owns about 41 percent of Green Growth’s outstanding shares, a company spokeswoman said.

The company is seeking other investors for the remainder of the C$300 million financing.

It’s unlikely that Aphria will recommend shareholders accept the formal takeover bid, CIBC analyst John Zamparo said in a note published Wednesday.

“Combining Aphria’s sophisticated domestic production capabilities and expansive distribution arrangements with the retail expertise and management team of Green Growth Brands would, in our opinion, form an attractive business,” Zamparo wrote. “However, we believe that ultimately this bid will not entice a majority of Aphria shareholders.”

Better Offer

The combined company will be one of the largest U.S. cannabis operators by market capitalization and the only North American-wide cannabis operator at significant scale, according to Green Growth’s statement. Its long-term goal is to establish a presence in each U.S. state where the sale of cannabis and cannabidiol is legal.

Green Growth signaled its intention to acquire Aphria in late December, about three weeks after the company came under attack from short-sellers. Aphria stock lost more than half its value in the days following the short report, which alleged the company paid inflated prices for assets held by insiders. The stock has since regained most of that lost ground.

Aphria has appointed a special committee to review the short sellers’ allegations, which it called “false and defamatory.”

At least one Aphria shareholder thinks the company will eventually get bought, either by another buyer or via a sweetened bid from Green Growth.

“I’d be surprised if Aphria exists in six months,” Greg Taylor, who runs a pot fund at Purpose Investments, said in an interview with BNN Bloomberg Television. “This puts Aphria in play.”

Green Growth’s offer to Aphria shareholders will commence on Wednesday and will remain open until May 9. The firm has retained Canaccord Genuity Group Inc. as its financial adviser and Norton Rose Fulbright Canada LLP for legal advice. Scotiabank and law firm Fasken Martineau DuMoulin LLP are working with Aphria.

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