Shares of Aphria (NYSE: APHA) sank 8.7% lower as of 11:29 a.m. EST on Monday after dropping as much as 10.5% earlier in the day. The decline appeared to be the result of investors' dissipating excitement related to a hostile takeover attempt of Aphria, announced late last week, by U.S.-based cannabis producer Green Growth Brands (GGB).
It isn't surprising that the euphoria that drove Aphria stock more than 12% higher last Friday would quickly evaporate. The proposed acquisition from Green Growth Brands wasn't all that attractive.
Green Growth stated that its offer price of 11 Canadian dollars (roughly $8) per share represented a 46% premium over Aphria's closing price on Dec. 24, 2018. However, Aphria noted in its public statement about the proposed takeover that the bid was around 23% lower than Aphria's average share price over the previous 20 days.
There are also serious doubts as to whether the price tag of the proposed deal would be as good as Green Growth Brands maintained. The U.S. company said that it planned to conduct a brokered financing deal to purchase Aphria. But Green Growth's share price was and still is well below the CA$7 expected valuation of its stock as part of the brokered financing deal.
In addition to these issues, an acquisition of Aphria by Green Growth Brands would present another major problem. Aphria's listing on the New York Stock Exchange (NYSE) and Toronto Stock Exchange (TSX) prevents the company from conducting business in the U.S. while marijuana remains illegal at the federal level. Since Green Growth Brands has U.S. operations, Aphria would likely be delisted from the NYSE and TSX if it is acquired by the company. Green Growth's shares trade on the much smaller Canadian Securities Exchange (CSE), which doesn't prohibit U.S. operations.
Aphria's board of directors established an independent committee to review the proposed offer by Green Growth Brands. Don't expect the current offer to be accepted. It's possible that Green Growth could come back with a more appealing offer, but the odds of a deal don't appear to be very high right now.
The hostile takeover attempt by Green Growth Brands did reveal something interesting that could be related to another Aphria story that investors are following. In the company's press release responding to the proposed deal, board chairman Irwin Simon made a statement. Aphria's previous chairman was current CEO Vic Neufeld. The company has made no announcement about the transition from Neufeld to Simon as chairman of the board.
Another independent board committee is currently reviewing allegations that Aphria overpaid for foreign acquisitions in a deal that profited insiders, including Neufeld. Although the results from this review haven't been announced yet, it's possible that Simon's replacement of Neufeld as board chair is one consequence of the story that caused Aphria's share price to plunge in December. The findings of the independent committee could be pivotal in what happens next with Aphria stock and the company's prospects to land a major partner outside of the cannabis industry, as some of its peers have done.
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