Hostile Aphria Bid Adds to Drama for Pot Firm Under Short Attack

(Bloomberg) -- U.S. cannabis retailer Green Growth Brands Ltd.’s unsolicited takeover offer for a Canadian pot producer is meeting skepticism from investors who question its ability to afford the transaction.

The proposed deal, announced Thursday, would see Green Growth acquire Aphria Inc. for C$2.8 billion ($2.1 billion). Aphria rejected the overture, and while it’s stock was up 13 percent to C$8.49 at 1:38 p.m. in Toronto on Friday, it remained below the proposed C$11 offer price. Green Growth, which trades as Xanthic Biopharma Inc., swung between gains and losses around C$5.

Although the nascent legal marijuana sector has been rapidly consolidating, this specific offer appears particularly “strange,” said Andrew Kessner, equity analyst at William O’Neil & Co. It’s unusual that Green Growth Brands -- with a market value a fraction the size of its target -- is the one doing the acquiring, and that it’s offering what Kessner says reads like “a hypothetical share price.”

“There’s a lot of skepticism around the deal,” Kessner said. When it comes to Green Growth Brands, “a lot of investors that we’ve been speaking to this morning who are familiar with the cannabis space haven’t even heard of them until yesterday." That has some wondering if this is “just sort of a PR play from Green Growth Brands to get their name in the spotlight,” Kessner said.

Expensive PR

Short-seller Hindenburg Research also questioned the bid, calling it “the newest act in the Aphria circus,” adding Aphria is “making a mockery of the capital markets.” Hindenburg said in a Friday note that it views the bid as non-credible and “an attempt to generate the appearance of demand in the hopes of spurring credible offers.”

A representative for Aphria didn’t reply to requests for comment. To help fund the offer, Green Growth plans to complete a C$300 million financing at C$7 a share. Aphria said the planned offer “significantly” undervalues the company and called its financing plan “quite risky” given that it’s more than double the recent average of Xanthic’s share price.

Valuations are subjective, Green Growth CEO Peter Horvath said. “We have a business plan that we feel supports our value and more, eventually,” he said in a phone interview on Friday. He dismissed the idea of the offer as a ploy, saying that would be “really expensive PR” given the cost of M&A lawyers and investment banking fees. “It wouldn’t make any sense to do that," he said.

Intertwined Companies

One key concern about the deal is how intertwined the two companies already appear to be. Aphria acknowledged in Friday’s statement that it has a “passive investment” in Green Acre, private cannabis investment fund and a stakeholder in Green Growth Brands. Aphria was one of the two lead investors in Green Acre when it was founded in January 2017. Chief Executive Officer Vic Neufeld and Shawn Dym, an Aphria director, also sit on the advisory board of Green Acre, according to an August statement. Dym was on the board of Green Growth Brands at least until October.

Neufeld was chairman of Leamington, Ontario-based Aphria until Thursday, when the company announced Simon Irwin would step in as independent chair, effective immediately. Aphria set up an independent committee to consider the merger proposal that is made of directors with no relationship to Green Acre or Green Growth, it said.

Hindenburg flagged the “numerous signs of Aphria related-party influence” as one of its concerns with the offer, and claimed that Green Growth is a little-known entity with limited financial financial data.

Arm’s Length

Green Growth makes beauty and wellness products using cannabis-derived ingredients, according to its website.

Hindenburg Research and Quintessential Capital Management have targeted Aphria, one of Canada’s biggest pot producers, before. They alleged on Dec. 3 that the company overpaid for Latin American assets held by insiders. Aphria called the allegations false, saying the purchase was a transaction negotiated at arm’s length and that both companies retained professional financial advisers. The report cut the company’s shares almost in half over two days.

“There are some ties between the two companies, but if the question is: ‘Is there some sort of nefarious collaboration happening between the two companies to manipulate Aphria’s stock price without any intention of actually completing the transaction?’ I don’t think so at this point,” Kessner said. He acknowledged, however, “I think there’s a lot of skepticism around the deal.”

To contact the reporters on this story: Janine Wolf in New York at jwolf71@bloomberg.net;Luca Casiraghi in London at lcasiraghi@bloomberg.net

To contact the editors responsible for this story: Anne Riley Moffat at ariley17@bloomberg.net, ;Crayton Harrison at tharrison5@bloomberg.net, Jacqueline Thorpe, Jonathan Roeder

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