In early December, Aphria’s (NYSE:APHA) M&A prospects were quite promising. Reports by short sellers had dinged the valuation of the cannabis producer’s stock to an industry-low level. But the company still had broad and robust exposure to the burgeoning global cannabis market.
As a result, after cigarette giant Altria (NYSE:MO) and alcoholic beverage giant Constellation Brands (NYSE:STZ) pumped billions of dollars into the cannabis space, it looked likely that much-cheaper Aphria was due to attract its own huge investment.
Fast forward a few weeks. Aphria has received a takeover offer. Sort of. But it isn’t the sort of takeover offer that will send Aphria stock to the moon. Instead, it’s the sort of takeover offer that will keep Aphria stock volatile and rangebound around $6.
There was a takeover offer. But the suitor is little-known U.S. cannabis retail company Green Growth Brands (OTC:GGBXF), whose shares are also traded on the Canadian Securities Exchange. The all-stock offer is highly irregular and rather confusing. There are some red flags regarding the credibility of the offer, too, and there is little likelihood that Aphria will receive higher bids.
So while Aphria got an M&A offer, it wasn’t the type of offer the bulls were looking for. Instead, it is arguably the weirdest M&A offer in recent memory. Ultimately, it won’t push Aphria stock higher. Instead, it will keep the shares volatile and rangebound for the time being.
Lots of Red Flags
As I mentioned before, the hostile takeover offer from GGB is very weird.
First and foremost, the suitor is weird. Green Growth Brands is a U.S. cannabis retail company with one retail location and market caps of about C$800 million on the Canadian Securities Exchange and $200 million on the U.S. OTC markets. The company just started producing revenue a few months ago and is still running huge losses.
Moreover, it has only been publicly traded for a few months, and its shares only got to the stock exchanges through a reverse merger. Despite its relative infancy, Green Growth Brands is trying to fully acquire a Canadian cannabis producer at a price tag that represents more than twice the current value of GGB itself. That’s odd.
To make things more odd, Green Growth is backed by the Schottenstein family, billionaires who own stakes in multiple, huge retailers and attempted to launch a joint venture with Aphria back in 2017. The joint venture failed, but nonetheless raises eyebrows. Also, GGB’s second-largest shareholder is a fund backed by Aphria, and Aphria CEO Vic Neufeld sits on the board of that fund. There are also reportedly numerous overlaps and connections between the board of Aphria and the board of GGB.
In other words, there are a ton of red flags when it comes to the credibility of the suitor and the offer. Nonetheless, even if we disregard those red flags, there are more red flags involving the structure of the deal.
This is an all-stock offer. Under the proposal, the owners of Aphria stock would get 1.5714 shares of GGB for each share of APHA that they hold. GGB says that this equates to a C$11 per share valuation for Aphria stock, which represents a massive premium over its current level. But that math is based on Green Growth’s own theoretical valuation of GGB stock at C$7, when in reality its share price is below C$5. The theory is that GGB intends to raise C$300 million at a valuation of C$7, and therefore, the stock price will eventually head towards that level.
But that likely won’t happen. The market isn’t turning a blind eye to the oddities and irregularities of this deal and the suitor. Thus, it seems unlikely that the market would push up GGB stock to C$7 just because there’s a C$300 million raise at that valuation. If GGB stock stays stuck around C$5, the takeover would value each share of APHA at around C$8. That equates to about $5.80 for the U.S. shares, while Aphria stock closed at $6.01 on the NYSE yesterday.
It’s Probably a Legitimate Offer
There are many observers out there who are calling this takeover completely bogus. While there are red flags, and those red flags will likely keep the deal from happening, I don’t think the offer is completely bogus.
Instead, there is a billionaire Ohio family who has a wealth of resources They believe that they can leverage those resources and the knowledge they have to create a world-leading cannabis company. The only problem is they need the cannabis. They tried to get the cannabis last year. It didn’t work out. Now, they are trying again, but this time they have more firepower than last time because they have a company that is public and sizable enough to launch a takeover bid.
Meanwhile, their timing couldn’t be better. Aphria stock has gone from a valuation of nearly $4 billion a few months ago to just over $1 billion today. Thus, GGB sees this as an opportunity to buy the valuable underlying cannabis assets of Aphria at a sharp discount.
The offer makes sense. In theory, the deal should happen.
But it might not happen because of all the irregularities. Also, if it does happen, that doesn’t mean Aphria stock is attractive.
Any deal most likely won’t happen at the C$11 price that GGB is proposing. Instead, it will happen around C$8 per share, implying that Aphria stock will remain volatile and rangebound for the foreseeable future. Investors should buy Aphria stock on big dips and sell Aphria stock on big rallies.
The Bottom Line on APHA Stock
Aphria stock is still the cheapest, most legitimate Canadian cannabis stock out there. That means it is still an interesting long-term play, regardless of the near-term noise.
But the near-term noise is occurring when the shares are at an all-time high and the company has received a highly irregular, odd takeover offer. This takeover offer, in theory, should be the boost that causes Aphria stock to rally in a big way. In reality, though, all it will do is keep the shares volatile and rangebound for the foreseeable future.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.