Headlines revolving around Green Growth Brand’s attempt at a hostile takeover of Aphria Inc express concerns regarding possibly inappropriate ties between the two companies. The war of words seems to be reaching a dramatic peak and includes short sellers releasing reports early in December, a larger company investing in a smaller company that turns around and tries to buy the whole thing and a lot of finger pointing. So was the GGB offer for Aphria a bunch of smoke and mirrors when distraction was needed?
U.S. cannabis retail firm Green Growth Brands, a division of Xanthic Biopharma, made a hostile year-end takeover offer for Canada’s Aphria, a major cannabis producer trading on the NYSE. What many consider a lowball offer based on short-term stock volatility was declined with Aphria pointing out that the offer from GGB is “based on a hypothetical valuation of its own shares, with no relation to the current price.” A lot seems to be staged in this particular show.
Short sellers on the move
In early December 2018 a short-seller, Quintessential Capital Management (QCM), released a report and related research materials on Aphria Inc. (TSX: APHA; NYSE: APH). QCM maintains that “Aphria is part of a scheme orchestrated by a network of insiders to divert funds away from shareholders into their own pockets.” The alleged scheme is based on the use of shell companies created to hide ownership and movement of money.
QCM states that it opened its SHORT position in Aphria because the eventual discovery of the scheme and the write-off of associated assets would lead to a disastrous decline in stock price. Whether the scheme has been “discovered” depends on whom you ask. Aphria’s shares have experienced a tough end of the year with short sellers seeing great gains in cannabis stocks especially in Aphria.
Green Growth to the rescue
While QCM got December off to a strong start, it was the “hostile takeover” bid from Green Growth Brands Ltd. (CSE: GGB, OTC: GGBXF) that seemed to seriously concern Aphria watchers. Suddenly the behind-the-scenes connections described by QCM were coming to life. But Green Growth’s CEO Peter Horvath countered those concerns in an interview walking through the details.
QCM’s take on the whole affair was to describe it as the “newest act in the Aphria circus.”
An act which was listed on the CSE via a reverse merger and currently operates, in the U.S., one retail cannabis store and one cultivation and production facility. QCM considers GGB to be “largely a worthless entity with numerous signs of Aphria related-party influence.” It designates the deal as “merely an epic next step of Aphria’s brazen shell game.”
Aphria’s response
Aphria has seen many ups and downs this year including a lot of positive attention in October when talks of discussions with cigarette king Altria were leaked. The news gave Aphria’s stock a boost though, overall, it was in the midst of a downward spiral that continues. Its response to the hostile takeover attempt made it clear that, whatever else is underway, management can see a bad deal when offered.
Addressing one of the key oddities of the deal, Green Growth Brand’s (GGB) self-valuation, QCM chair Irwin Simon stated that the “proposed offer is quite risky given GGB’s condition to complete a brokered financing at a price that is more than double the recent average of their share price, as a key term to the proposal.”
For its part, GGB came back with an end-of-year argument that puts forth their take on valuation including the “additional value creation from recent announcements” and the immeasurable value of having “first-to-market cannabidiol (CBD) business.” Though GGB may be overvaluing its contribution, it does have an actual business as well. Unfortunately, there is no indication that it has an actual offer to make that a normally functioning business would accept.
One criticism made of GGB’s offer is that it may be designed to fail while simultaneously generating the “appearance of demand in the hopes of spurring credible offers.” While a reverse takeover of a shell company seems a bit overboard for a market-creating news event, Green Growth CEO Horvath’s responses are oddly lack-luster, on the defensive when he should be on the offense. The reality is that such a response is not likely to dispel rumors.
And there are worse things than rumors to dispel as numerous lawsuits related to fallout from the Hindenburg Research and QCM reports on Aphria. In response, Aphria has created a Special Committee to take a closer look at relevant LATAM operations.