Back in February, Green Growth Brands (GGB), with a market cap of $730+ million, launched an audacious bid to takeover Aphria (APHA), itself valued at $2.5 billion. The offer was in the form of an exchange of 1.57 shares for each APHA share. At last check, the offer is worth $1.15 billion. Needless to say; no rational individual will tender their shares at these levels.
The offer is open until May 9, and that leaves open the possibility that GGB will sweeten its offer. (GGB is backed by the Schottenstein family whose net worth is estimated at $2.8 billion. This is hardly chump change, but it doesn’t change the fact the deal makes little sense.)
This may sound like a bold statement considering the success of Jay Schottenstein (who backed American Eagle Outfitters and DSW). Owning APHA would give GGB its first exposure to the recently legalized cannabis market in Canada.
Aphria has distribution agreements for recreational cannabis that covers virtually all of Canada, as well as in Europe, South America, Africa, and Australia. Also, Aphria is currently running at just under CA$100 million ($75.06 million) in revenues (as well as a CA$85 million—$63.80 million—operating loss). Even considering the losses, it is easy to see why the Schottenstein family is singing “Oh Canada”.
Aphria has several brands aimed at different market segments. Names include Broken Coast, Good Supply, RIFF, and Goodfields. Much like any packaged goods company (think Procter & Gamble), Aphria brands produces and distributes whatever retail volume comes from online sales.
Retail is at GGBs core
Green Growth also produces and distributes to brands like Seven7h Sense and Meri+Jayne, as well as to retail venues that include Green Lily and The+Source dispensaries. GGB management includes recently appointed CEO Peter Horvath and COO Randy Whitaker, both veterans of Victoria’s Secret and American Eagle.
GGB has a leg up in Nevada where it is authorized to open 7 The+Source dispensaries. To support these efforts, GGB just spent $12 million to acquire cultivation facilities in Nevada and another $10.3 million to acquire ZLIT that owns Arizona Natural Pain Solutions.
If everything were logical
With a lengthy background in retailing, not to mention stacking GGB management with retail-centric thinking, there is only one conclusion—Green Growth Brands is not only engaging in a battle they won’t win, but they’re also not using the talents of some of their top management.
Instead of chasing after Aphria and it’s Canadian goodies, why not concentrate on the potentially larger U.S. market? In fact, there is an American version of Aphria, and its name is Liberty Health Sciences (LHS.CN). Before its spinoff, Liberty represented the U.S. operations of Aphria.
Just recently we wrote about Liberty Health Sciences, spelling out why we felt this $255 million market cap was unlikely to thrive on its own shaky financials. Several cannabis companies may be looking at Liberty at this moment, so this analysis is not limited to GGB. There is merely a higher level of logic for a $730 million company like GGB to acquire a company about half its size and where their branding and marketing management can be put to better use.
So what would GGB get for its efforts? For starters, Liberty is into Florida big time. In early March the company opened its 11th dispensary in the sunshine state. This total is believed to place Liberty in a leadership position. Florida, with a population of 21 million, is the third largest market for cannabis, and that was before any legalization for recreational use occurred.
Liberty’s product line appears identical in brand name with Aphria. So any buyer of Liberty receives the benefits of owning Aphria in a U.S. market with 10 times the potential of Canada.
But there is more than just retail. Liberty operations are vertical with their Alachua and Gainesville Florida accounting for a 150,000 square feet of combined production. This has real value as well, especially when considering both the cost and time required to get approvals from the DOH.
Disclaimer of ignorance
There are many reasons why some deals get done and others don’t. The fact that Liberty is facing multiple class action lawsuits and just tossed out its CEO and CFO no doubt plays some role in the underperformance of its shares. But class action lawsuits alleging false and misleading statements typically are settled for pennies on the dollar.
So the saga of GGB’s pursuit of Aphria will go on most likely until at least May 9. Why GGB chooses to chase its own tail rather than taking a more realistic path down in Florida is a mystery.