Even a marriage made in heaven requires one important event to occur. Both the bride and groom first need to make their way to the altar. In the case of the much talked about hostile offer last week by Green Growth Growth Brands (OTCMKTS:GGBXF) for the larger Aphria Inc. (NYSE:APH), heaven may have to wait.
The offer faces enough hurdles that any smart M&A advisors should have recognized a while ago. But, as we have witnessed already, the emerging legal cannabis industry is in a deal-making frenzy.
In the heat of battle, strategies that are difficult can be deemed as imperative. This looks like one of them.
Before counting all the hurdles, let’s go back and look at what makes sense about a combination of Green Growth and Aphria.
If the deal is consummated, a cannabis powerhouse will be created. The combination of the two creates a monster North American player operating on both sides of the border. Imagine the combination of Aphria’s Canadian supply and wholesale agreements with Green Growth’s vertically integrated operations including cultivation, manufacturing and retail.
So the best reason for the deal is that it makes sense from a marketing and supply standpoint. It represents a way for Aphria to go full speed into the U.S. market. If marketing logic were the only reason to do a deal that would be one thing.
However, as a mentor of mine once told me, “if everything were logical, cowboys would ride sidesaddle.” Investors demand profits either in the form of capital gains or earnings (and dividends). All the promise of revenues, of course, is nice, but it only goes so far.
Little fish/Big fish
It is extremely challenging for a minnow to swallow a whale. The market capitalization of Green Growth at about $755 million compares with Aphria at more than twice the cap at $1.8 billion. GGB already has 177 million shares out. After exchanging 1.57 of GGB shares for all Aphria stock, you are talking about 455 million shares.
In a separate effort, GGB is seeking to raise almost $350 million in an offering. If successful the share total balloons to over one half billion. This seemingly gigantic amount pales in comparison to the overly generous folks at Aurora Cannabis (NYSE:ACB) that sport close to a billion shares out.
— Green Growth Brands (@GG_Brands) January 4, 2019
But that begs the question: How do shareholders of Aphria benefit under terms of the present Green Growth offering? If you do the numbers, the answer you will come up with is “not enough!”
Normally in hostile deals, the buyer comes to the table prepared with at least one sweetened offer. GGB could do this of course but that only produces greater dilution to shareholders.
Aphria’s numbers are attractive
In the Fiscal Year 2018 that ended last June, GGB lost $2.1 million. Based on results announced to date, that is about where the bottom line is headed for 2019. True, most cannabis companies are reporting losses, so why should GGB be singled out?
Because not every company has an offer out for Aphria.
For Aphria shareholders, the financials present the picture of a company with some unusual strengths. In fiscal 2018 revenues totaled $36 million. They are currently running at an annualized rate of roundly $100 million for the May 30 year end. Aphria is also quite profitable. Gross margins (net revenues-production costs) are 54 percent.
This is impressive.
So the entire sizzle is on the marketing side. That’s cool, after all, this is what legalization is all about. But instead of a GGB takeover, why not create a joint venture that provides a benefit for shareholders in both companies.
Admittedly, the history of corporate joint ventures is not particularly good. Nevertheless, taking the risk makes far more sense than trying to attract Aphria shareholders with something that is more like a plate of financial linguine.
Is GGR doing Aphria holders a favor by putting the company in play? The answer is yes if you accept Aphria’s financial statements and disregard last years Hindenburg Research declaring Aphria a “black hole” and valuing the company at zero. The stock fell over 9 percent on that day.
Is Hindenburg right? At $7 per share, half of its September price and selling at book value, it may not even matter.