Green Growth has begun soliciting proxies from Aphria shareholders in their attempted hostile takeover. Here’s what that means – and what you should do if you’re caught in the middle…
Although neither of these companies is currently in our Cannabis Investor’s Report or Cannabis IPO Insider model portfolios, it is important that members of the National Institute for Cannabis Investors pay attention to how this deal shakes out.
You probably remember my coverage of this hostile takeover attempt late last year. At the time, I explained how the attempt was yet another example of the rapid consolidation of the cannabis industry.
Mergers and acquisitions are vital to this stage of the industry’s growth, and we cannot undervalue the significance of a hostile takeover to that growth, regardless of how the Aphria/Green Growth story plays out.
Since that original news broke, there’s been an important development. Specifically, Green Growth Brands is soliciting votes from Aphria shareholders in hopes of gaining enough support to make the deal happen.
Aphria, for its part, says that Green Growth’s offer is inadequate.
So, if you happen to own Aphria’s stock and received a form from Green Growth, you might be wondering: “What’s my best course of action?”
What Should Shareholders Do?
At current prices, Aphria is right that Green Growth’s offer is not adequate, and I do not recommend supporting Green Growth Brands hostile takeover. The good news is that you do not need to take any action to “vote” to reject the offer.
Just ignore the documents you received from Green Growth Brands.
Here are more details on why this offer is inadequate…
The Green Growth Brands offer would give Aphria shareholders 1.5714 shares of Green Growth Brands for each Aphria share owned. Green Growth Brands says that their offer is worth C$10.00 per share, since it has new equity investors lined up to purchase Green Growth Brands equity for C$7.00 per share. Basically, Aphria is saying that even though their stock trades at C$4.93 per share, if you assume that it is worth the C$7.00 that it has new investors lined up to pay, then its offer is worth C$10/share.
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However, there are two problems with Green Growth’s argument. The first is that while it’s great that Green Growth Brands is able to raise new equity at $7.00 per share, the stock is not trading anywhere near that level. It is trading at $4.93 per share. When you do the math, $4.93 times the 1.5714 shares is only $7.74 per share.
And Aphria is trading at $13.37 per share.
The second problem is that even if Green Growth were to start trading at $7.00 per share, that price times the exchange rate is only $11.00 per share.
That’s still a discount to where Aphria is currently trading. So no matter what assumptions you make, Aphria shareholders lose by taking Green Growth’s deal.
The idea of an Aphria/Green Growth combination is not a bad one. I like the idea of a cross-border cannabis powerhouse, even if it couldn’t do much business across that border until the U.S. federal government makes cannabis legal across the country.
The combined resources of such a company would be formidable, and it would offer branding opportunities in the two largest cannabis markets even before the federal government acts.
In this case, there would be some downsides, mostly the loss of Aphria’s coveted NYSE and TSX listings, but the Canadian Securities Exchange is a sufficient liquidity provider these days.
And even though Green Growth Brands is the aggressor in this battle, its current shareholders would end up owning less than half the resulting company. So unless Green Growth offers a real premium to Aphria shareholders, what it’s really asking Aphria shareholders to do is force Aphria to take over Green Growth Brands!
So, to reiterate, take no action on any forms you might have received from Green Growth Brands. I like both these companies, and I’m looking forward to the end of this unfortunate chapter in their growth.
Thank you for being an important member of the National Institute for Cannabis Investors,
Executive Director, National Institute for Cannabis Investors
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21 responses to “Green Growth Ups the Ante in Its Takeover Bid”
March 05 2019