Green Growth Brands’ Aphria Takeover Offer Enticing, But Falls Short

In an interesting move, Columbus, OH based Green Growth Brands (GGB) has put forward a highly anticipated unsolicited takeover offer of Canadian marijuana producer Aphria (APHA).
 
After market on Tuesday night Green Growth Brands formally announced their takeover bid to commence on January 23, 2019, backed by a $150 Million commitment from All Js Greenspace LLC. They plan on completing a $300 million third-party equity financing at $7 a share, making up the remainder from other investors. The offer will be open for acceptance until 5PM EST on May 9, 2019. Terms of this deal are very similar to a proposal put forth on December 27, 2019, consisting of an all share offering of 1.5174 shares per Aphria share.
 
Putting forth a number of reasons to accept the offer, Green Growth Brands believes that combining the two companies is “extremely compelling”, but Aurora has advised its shareholders to stand pat for now, pending a formal recommendation to Aphria’s Board of Directors. In response to the previous offer Aphria did say that the offer was too low. 

Green Growth Brands believes there is a number of synergies that make the deal attractive, including combining Aphria’s production capacity with their retail expertise. This sounds like a good combination, as we have been saying Cannabis Retail is the next big market and they do have a large footprint in the US, but they don’t have as much of a foothold in the Canadian market that a company like Choom has.
 
Under Attack
 
Aphria has been under attack recently from short-sellers, and one could look at this offer as an opportunistic attempt to capitalize on that. Aphria shares lost more than half their value following the attack, but have rebounded since. Having said that, Aphria still remains one of Canada’s largest producers, with a low cost of production and a suite of good brands including BC’s Broken Coast.
 
Our Take
 
Green Growth Brands haven’t offered anything substantial to sweeten what was already a low offer driven by opportunity. Despite the short seller attacks, Aphria remains a solid company and we aren’t sure what exactly Green Growth Brands is bringing to the table to improve Aphria’s position. It seems like a company trying to take advantage of a weakened Aphria with a bold move.
 
In addition there is a major question surrounding the cross-border technicalities. If completed this would be the first large cross-border takeover in Canada, and according to Green Growth Brands it would make them “the only large-scale cannabis company to bridge U.S. and Canadian markets” and create an “unparalleled North American Player”.
 
The problem with this though, is that Canada has tight regulations in place around cannabis marketing, as illustrated by this excerpt from the Cannabis Act:
 
“It is prohibited to promote … cannabis, a cannabis accessory, a service related to cannabis or a brand element of any of those things in a publication that is published outside Canada, a broadcast that originates outside Canada or any other communication that originates outside Canada.”
 
Green Growth Brands has not explained how they would manage these regulations.
 
Aphria does seem ripe for a takeover, but for anything to happen Green Growth Brands will have to sweeten the offer and ensure it’s compliant with Canadian Regulations. Another option would be for a different third party Canadian company like Tilray to step forward with a better offer.