Bottom Line:

Grizzle pushed back hard since the release of the recent short report that Aphria was not a worthless stock and the hostile offer announced last night is a form of vindication.

Aphria has real value. The Green Growth offer makes that clear.

Given the current circumstances, this is the best outcome for shareholders, with Green Growth Brands, (CSE: GGB) effectively putting Aphria in play.

The short report and this hostile bid are forcing the hands of any consumer companies waiting to enter the space.

Aphria is one of only two large, diversified cannabis growers still available for a consumer investment.

Aphria is unique, with the industry’s lowest growing costs and a globally diversified footprint to rival any competitor.

Consumer packaged goods companies starved for growth will have to move now or lose Aphria to a competitor or other cannabis player.

If they want to enter the space later they will be paying much more than the $8.50/gram of funded capacity Aphria trades for today.

Constellation Brands valued Canopy Growth at $23/gram, including warrants, and Cronos took money from Altria at a $55/gram valuation so we know the Green Growth offer at $10/gram has simply set a floor for a more realistic bid.

Once a company is subject to a hostile bid all options are on the table, management no longer can determine the future of the company.

The only outcome that matters is the one that maximizes value for shareholders.

Recent M&A provides too much support for the company to end up being acquired for C$11/sh.

As shareholders, we call on Aphria to open up the data room and let consumer packaged good (CPG) companies see the true value of what you have built.

Aphria is up for sale for only $8.50/gram while Canopy Growth and Cronos gave up corporate control at $23/gram and $55/gram valuations respectively.

With more than 80% of shares held by public shareholders, they are in the driver’s seat and will demand the best price, regardless of whether it comes from a full company buyout or from a sale of the most valuable pieces by an activist.

The game is afoot.

Details of the deal

News broke after market close yesterday that Green Growth Brands (CSE: GGB) will be initiating a hostile takeover for Aphria.

The deal would value Aphria at C$2.8 billion, a 45% premium to where the stock traded in the past 10 days.

Investors should keep in mind that the C$2.8 billion valuation uses a $7 share price for Green Growth, which is much higher than the current stock price of $5.00/sh but in line with the pricing of a new C$300 million bought deal.

The real value of the deal is closer to C$2 billion or C$7.80/sh which implies $8.00/gram of funded capacity.

Further, if we use Green Growth’s average trading price before the stock run-up, this deal is offering only C$5.50/sh for Aphria, far too low.

Green Growth is hoping a planned C$300 million capital raise will convince investors it is serious about acquiring and growing Aphria.

Aphria worth far more than C$2 billion.

On a fundamental basis, the cashflow from Aphria’s Canadian greenhouses could be worth as high as C$15/sh on their own based on management guidance.

An acquirer would gain multiple international licenses and some greenhouses currently producing with others requiring minimal Canadian dollar CAPEX to complete.

Recent consumer company investments in the space imply Aphria is worth far more than C$15/sh.

Using deal comps from Altria and Constellation’s investments into Cronos and Canopy Growth, Aphria is worth $22-$54 per share based on funded Canadian capacity alone.

The Clock is Now Ticking

The Green Growth offer has put consumer companies on the clock to the benefit of Aphria shareholders.

We as shareholders don’t care if value comes from a full buyout, equity investment, or from an activist taking over the company and selling it piecemeal.

The bid from Green Growth has kicked off what we believe will be a series of near-term positive catalysts for the stock.

Regardless of how this story develops shareholders are better off now that Aphria is officially in play.

The irony for cannabis investors is that even if they bought Aphria the day before the release of the short report, they would still own a stock that performed in line with the broader cannabis index.

Now that Aphria is the only stock with public M&A catalysts, it is likely to continue outperforming the cannabis industry as a whole.

Cannabis Stock Performance in December

Marijuana Company Performance since APHA Short Report

Source: Yahoo Finance

EV/EBITDA in 2020

2020 EV-EBITDA Multiple Comparison - Dec 28 2018

Source: Grizzle Estimates

In the interest of full disclosure, employees of Grizzle personally purchased and currently own stock in Aphria Inc. See the Content Disclosure section here on our Terms and Conditions page for more details.