Green Growth’s Aphria play: Why the hostile takeover bid is so unusual – and so bold
Green Growth Brands Inc. filed its formal bid for Aphria Inc. this week and two things are clear: This is no ordinary takeover bid, and winning over the target’s shareholders will be an uphill battle.
The terms of the hostile bid, outlined in a takeover circular, are rare – if not almost unheard of. In a normal takeover, the acquirer is usually bigger than the target; in this case, a newly created U.S. company is trying to snap up one of the largest legal cannabis growers in the world.
The math behind the purchase price is also murky. When first announcing its takeover intentions, Green Growth claimed its offer was worth $2.8-billion. But because the transaction is an all-share deal, the value is based on the price of Green Growth’s stock. The $2.8-billion value is derived from a $7 share price – yet Green Growth has never touched that value.
“It is very perplexing on its face," said veteran mergers and acquisitions banker Brent Walker at Morrison Park Advisors. This type of merger isn’t unprecedented, he said, “but it doesn’t happen often.”
When Green Growth first announced late last month that it intended to bid for Aphria, the Leamington, Ont.-based pot producer was under siege. Short-sellers accused the company in a December report of overpaying for international acquisitions it made last summer, sending its shares tumbling and prompting some big changes at the company.
In the past month, Aphria announced that chief executive officer Vic Neufeld and co-founder Cole Cacciavillani will be standing down from their executive roles in the near future. The company has also named new financial and legal advisers in Bank of Nova Scotia and Fasken Martineau DuMoulin LLP.
In advising Aphria, Scotiabank is making its first foray into the cannabis space. On the legal side, Aphria’s hiring of Fasken is a break from long-time legal adviser Stikeman Elliott LLP, a development that comes weeks after The Globe and Mail reported the pair would cut ties. Aphria did not respond to requests for comment on the status of its relationship with Stikeman. Stikeman declined to comment.
Amid all the drama, a window was cracked open for Green Growth. In the takeover circular filed this week, Green Growth acknowledged that the short-seller reports "presented a potential opportunity.”
Its task now is to convince the scores of retail investors who predominately own Aphria that the Green Growth offer has real merit, and that the financing underpinning the bid can be executed. Aphria, for its part, has told its shareholders to refrain from taking action on the bid.
On strategy, Green Growth’s success will likely depend on selling Aphria investors on its vision. The bidder’s pitch is that it will add value by combining its management team’s deep retail roots in the United States, having served in senior roles at the likes of American Eagle Outfitters and Victoria’s Secret, with the formidable cannabis producer. Analysts at CIBC World Markets Inc. acknowledged the strategy makes sense – but added there isn’t enough of a premium to sway Aphria investors to tender.
“We believe that ultimately this bid will not entice a majority of Aphria shareholders,” CIBC analyst John Zamparo wrote in a research note Wednesday.
The financing is a trickier matter. The offer’s $2.8-billion value was based on a valuation of $7 a share of Green Growth, but when the announcement was made, Green Growth’s stock had been trading at $4.98. To bridge the gap, Green Growth said it expected to complete a $300-million financing at $7 a share – which would presumably boost the stock price.
At the time, Green Growth promised that it would soon provide more financing details. The formal bid this week only complicated matters. The suitor revealed that it has lined up All Js Greenspace LLC to buy up to $150-million of the financing, yet All Js Greenspace is closely tied to the Ohio-based Schottenstein family that created Green Growth.
All Js is also already Green Growth’s largest shareholder, which means the suitor’s backers have simply promised to buy more stock if they acquire the lucrative target.
While rare, such a tactic has been seen before: In Amaya Gaming Group’s acquisition of PokerStars' parent company. (A spokesman for Green Growth declined to comment on the takeover terms and to discuss the Schottensteins' connection to All Js.)
When Amaya announced the US$4.9-billion online poker takeover in 2014, its revenues were roughly one-tenth that of target Rational Group Ltd. To pull the deal off, Amaya lined up US$3-billion in debt financing, and also got commitments from investors to buy shares in an equity financing.
However, that was possible, said Mr. Walker, the mergers and acquisitions banker, because the two firms had good reason to come together. “In situations like that, investors are looking at the pro-forma company," he said. PokerStars was a giant, but it had gotten into legal trouble and had been shut out of the U.S. market; selling to a Canadian company made it seem much friendlier.
That Green Growth is using Amaya’s takeover strategy makes sense, considering that Canaccord Genuity served as both companies' lead financial adviser. Yet this time the investment bank seems to have a tougher sell.
For one, the Amaya deal was a friendly deal, not a hostile takeover. And in that transaction, the major investor supporting the transaction, Blackstone Group, was fully independent – not an insider. Canaccord could not be reached for comment.
But Green Growth’s bid is open until May 9, and the cannabis sector has proven that a lot can change in short period of time.
Canadian cannabis producer Aphria Inc. and its American suitor first held discussions about a potential partnership last September, in a sit-down brokered by Aphria’s recently replaced legal adviser, new regulatory filings reveal.
On Wednesday, Aphria’s board rejected a hostile takeover bid launched by Ohio-based Green Growth Brands Inc. The suitor is a newly created company backed by the Schottenstein family and run by former retailing executive Peter Horvath.
In its circular rejecting the takeover approach, Aphria revealed that its chief executive and a board director first met with Green Growth in September to discuss an investment or joint venture. The disclosure changes the narrative around the history between the two companies. Until the filing, Green Growth had only said it previously considered multiple opportunities, and specifically targeted Aphria in December after its stock price plummeted in the face of short-seller attacks.
The takeover circular also adds details to the web of connections between Aphria and Green Growth – overlap that has raised questions about the suitor’s independence – and sheds new light on Aphria, which has recently undergone shakeups at both the board and executive levels.
In its filing, Aphria disclosed that CEO Vic Neufeld was invited to the September meeting by the company’s previous counsel at Stikeman Elliott. The law firm has since been replaced as the company’s legal adviser. Stikeman Elliott declined to comment, saying it does not talk about client matters.
Aphria also revealed that director Shawn Dym accompanied CEO Mr. Neufeld at the September meeting. Mr. Dym sat on Green Growth’s board of directors until November, 2018, and was a director of both companies during the sit-down.
Mr. Dym also contemplated different options for Aphria’s future in December and held “conceptual discussions with representatives of three different cannabis companies about a potential transaction (one of which was Green Growth)," according to the filing. Aphria said these discussions “were not the result of any direction from the Aphria board."
Because of this history, Mr. Dym abstained from voting on the board’s rejection of the hostile takeover bid on Wednesday. He did not return a request for comment.
Finally, the new circular clarifies an unusual disclosure in Green Growth’s own takeover filing in January.
When the suitor formally bid for Aphria on Jan. 23, it disclosed that Aphria had invited Green Growth to tour its cultivation facility in Leamington, Ont., on Dec. 20, at a time when the two companies were discussing a potential takeover in private. Yet on the day of the tour, Aphria’s counsel contacted Green Growth’s lawyers to tell them that Aphria’s board wanted them to leave the premises. No explanation as to why was given in the filing.
On Wednesday, Aphria confirmed that 12 people tied to Green Growth, including company executives as well as Jay and Joey Schottenstein, were invited by Aphria’s management to tour its Leamington, Ont., cultivation facility. However, Aphria had just set up an independent committee to evaluate a potential takeover by Green Growth, so management was told “not to engage in a discussion regarding any potential transaction as any such discussions would be conducted under the direction and supervision of the independent committee.” After the tour was finished, Green Growth’s team was told by Aphria’s newly hired counsel to leave.
Aphria has overhauled its board and management team since December, when short-sellers alleged the company vastly overpaid for assets in the Caribbean and Latin America and Green Growth also went public with its intention to launch a hostile bid.
Aphria has explained little about the overhaul. However, after these developments the company appointed Irwin Simon as a new independent board chair. Previously, Mr. Neufeld was both CEO and chairman. When Mr. Simon was appointed, Aphria told The Globe and Mail that the appointment was made in “the normal course process to advance Aphria’s corporate governance,” and that “it did not have any relation to the GGB proposal.”
A few weeks later, in early January, Aphria announced that Mr. Neufeld would be stepping down as CEO in the coming weeks, as would co-founder and vice-president of growing operations Cole Cacciavillani. Shortly after that, Aphria confirmed that it had hired new financial and legal advisers – Scotia Capital and Faskens LLP, respectively.
Aphria did not respond to a request for comment for this story.
Shares of Aphria (NYSE: APHA) sank 10.2% as of 3:27 p.m. EST on Monday. The Canadian marijuana producer didn't announce any new developments, so why did its shares fall? There are two likely factors.
First, Canadian marijuana stocks in general declined on Monday in anticipation of quarterly updates from several major players, with Aurora Cannabis reporting its results after the market close. Second, Aphria's board of directors last week rejected a hostile takeover attempt by Green Growth Brands (NASDAQOTH: GGBXF), a decision that appeared to have zapped some enthusiasm among investors.
Marijuana in greenhouse
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Image source: Getty Images.
So what
Canadian marijuana stocks tend to move up and down together for the most part. It's not surprising that investors' anxiety over what several of the big players might report in their quarterly financial updates this week pulled Aphria down.
The company announced the results from its second quarter on Jan. 11, several weeks ahead of its peers. But its Q2, which ended on Nov. 30, 2018, only included around six weeks of sales from the recreational marijuana market in Canada. The updates from other big Canadian marijuana producers could provide additional clues about how Aphria's Q3 results might turn out.
The decision by Aphria's board to rebuff Green Growth's hostile takeover attempt was fully expected. The offer simply wasn't attractive, with the proposed price being too low. The deal would also have required Aphria to delist from the Toronto Stock Exchange and New York Stock Exchange.
So why would turning down a bad deal weigh on Aphria's share price? The most likely reason is that the deal, despite its flaws, ignited investors' excitement about Aphria after the stock had been shellacked following short-sellers' allegations about overpaying for the acquisition of Latin American operations. With Green Growth's takeover attempt now likely to fizzle out (unless enough Aphria shareholders tender their shares to the U.S.-based cannabis grower), there isn't any other immediate catalyst to light a fire beneath investors.
Now what
The big things for investors to watch with Aphria really aren't the two factors that caused the stock to fall today. Instead, the primary developments to keep your eyes on are two important upcoming announcements from Aphria's board.
One will relate to the conclusions from a review conducted by a special committee of independent directors looking into the allegations about Aphria's Latin American acquisition. The other announcement will be the board's decision on the choice for replacing CEO Vic Neufeld, who is stepping down from his executive position. These two announcements could potentially go a long way in helping Aphria move past the dark cloud that has hung over the company for the past few months.
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