Shares of Aphria (NYSE: APHA) jumped 13.5% as of 10:28 a.m. EST on Friday. This marked a nice bounce back from a steep decline following allegations made by short-sellers that the Canadian marijuana company significantly overpaid for its acquisition of LATAM Holdings and that Aphria insiders profited from the deal.
Aphria's rebound stemmed from two key factors. First, investors had time to digest the company's announcement yesterday that it was appointing a special committee of independent directors to review the LATAM Holdings acquisition. Second, Canadian marijuana stocks received a boost from news that big tobacco company Altria (NYSE: MO) is buying a 45% stake in Cronos Group (NASDAQ: CRON) for around $1.8 billion (2.4 billion in Canadian dollars).
The decision by Aphria to form a special committee to review the LATAM Holdings acquisition was a good move on the company's part. It sent the message that the company isn't trying to sweep the short-sellers' allegations under the rug. Forming the special committee of only independent board members who joined Aphria's board of directors after the closing of the LATAM Holdings transaction was appropriate.
Aphria mentioned that the special committee expects to retain independent advisors to assist in the review of the LATAM Holdings deal, which is also a positive sign. This would add more credibility to the special committee's findings.
It's often difficult to regain investors' trust after serious allegations are made against a company. Aphria appears to be taking the right steps needed to rebuild confidence in the company's leadership, although it's important to see what the special committee's findings are.
Altria's big investment in Cronos Group helped Aphria in a couple of ways. On a broad level, it reinforced the belief among investors that the global cannabis industry is poised for tremendous growth. A big company like Altria wouldn't fork over $1.8 billion if that weren't the case.
The Altria-Cronos transaction also reminded investors that more deals could be on the way. Aphria should be a potential candidate for a partnership with and an investment from a major player outside of the cannabis industry.
Aphria needs to show that it didn't pay an unjustifiable price for the LATAM Holdings acquisition and that insiders didn't profit materially from the deal. That could be what the special committee finds after its review. However, if the review shows otherwise, Aphria's share price is likely to be clobbered.
The allegations are a dark cloud hovering over Aphria that could negatively impact its prospects to land a deal like Cronos Group just did. The sooner the company can put the issues to rest, the better off it will be. And implementing processes that put a stop to even the appearance of impropriety in its transactions would be the best result from the latest controversy for Aphria.
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