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Jan 23, 2019

Aphria urges caution after Green Growth launches takeover bid

Why some see merit in Green Growth's bid for Aphria, despite skepticism


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Aphria Inc. (APHA.TO) is vowing to resist "opportunistic" takeover attempts while pledging to thoroughly review the formal takeover bid that was launched late Tuesday by Columbus, Ohio-based Green Growth Brands Inc.

"Any offer would necessarily need to be evaluated against the current and future value of our current strategic plan," said Aphria Chair Irwin Simon in a release Tuesday night. "We are also determined to protect Aphria shareholders from opportunistic offers that fail to reflect the substantial value and growth prospects we have built at Aphria. We will evaluate GGB's offer in this spirit."

Aphria said in its release that an independent committee of its directors will make a recommendation to the full board after considering the unsolicited bid and is recommending shareholders hold off tendering until then.

Green Growth confirmed on Tuesday it will offer 1.5714 of its shares for each Aphria share, which is the same exchange ratio presented in late December when the company announced its intent to make an offer to buy the beleaguered Leamington, Ont.-based cannabis producer. It also said the exchange ratio will not be adjusted to account for changes in its stock price.

Based on Green Growth Brands' closing price of $5.98 on the Canadian Securities Exchange Tuesday, the offer is worth $9.40 per Aphria share. Aphria's shares closed Tuesday at $9.43 on the Toronto Stock Exchange after recently falling as low as $4.76 on Dec. 5 in the aftermath of a critical report by short-sellers Hindenburg Research and Quintessential Capital Management. Quintessential subsequently indicated in a tweet earlier this month it was "moving on to new projects" after Aphria announced CEO Vic Neufeld was preparing to step down.

Green Growth is framing the potential deal as an ideal way to match Aphria's production skills with its own retail expertise, seeing as how the company's executive team comes to the table with background at major consumer names like Victoria's Secret, American Eagle and Bath & Body Works. 

It’s also giving itself some wiggle room, indicating in that its offer is conditional on “not becoming aware of any information corroborating in any material respect” earlier claims by Quintessential and Hindenburg. 

"The combination of Aphria's Canadian supply and wholesale agreements with Green Growth's vertically integrated operations and rapidly growing retail footprint in the United States best positions us to capitalize on the massive growth opportunities in North America and beyond," said Green Growth CEO Peter Horvath in a release. "I encourage Aphria shareholders to tender their shares to our offer."

Green Growth says it will also proceed with the US$300-million financing at US$7 per share that it previously outlined in December, while adding that All Js Greenspace LLC has agreed to purchase up to US$150 million Green Growth shares as a backstop to the financing. In exchange for the backstop, Green Growth will pay All Js Greenspace US$7.5 million in shares. As a result of that arrangement, All Js Greenspace could hold up to 12.5 per cent of Green Growth's shares.

Canaccord Genuity and Norton Rose Fulbright Canada LLP are advising Green Growth; meanwhile, Aphria has retained Scotiabank and Fasken Martineau DuMoulin LLP as its advisors.

Green Growth's offer is scheduled to expire on May 9, prompting one investor who owns shares in both companies to predict more twists and turns.

“I think this is just the start of the process,” said Purpose Investments Portfolio Manager Greg Taylor, who said he thinks there’s room for Aphria’s suitor to boost its offer.

“It will be interesting to see how it goes for the next few months – whether we get a friendly deal at the end of the day, if a white knight approaches Aphria to try to save them from Green Growth … I would be surprised if Aphria still exists (as an independent company) in six months.”

Cannabis Canada is BNN Bloomberg’s in-depth series exploring the stunning formation of the entirely new – and controversial – Canadian recreational marijuana industry. Read more from the special series here and subscribe to our Cannabis Canada newsletter to have the latest marijuana news delivered directly to your inbox every day.