A web of connections between Aphria Inc. and its suitor has come into focus in the wake of an unusual takeover offer for the Canadian cannabis company.
A number of Aphria directors, including chief executive officer Vic Neufeld, have been part of business dealings in the United States with the Schottensteins − the U.S. family behind the recent takeover proposal from Xanthic Biopharma Inc. Xanthic operates in the cannabis market as Green Growth Brands Ltd., and the Schottensteins are the company’s principal investors.
Aphria director Shawn Dym has also previously served on Green Growth’s board of directors, according to regulatory filings, and Mr. Neufeld has been on the advisory board of one of Green Growth’s largest investors.
The connections may be nothing more than coincidence, and in an e-mail, a Green Growth spokesperson said they do “nothing to change the merits of the offer.” But their existence adds another wrinkle to the proposal, which comes with unusual terms relative to merger and acquisition norms. Aphria’s board rejected the deal on Friday.
Under the share-for-share deal, Green Growth has proposed to acquire Aphria for $11 per share, or a total of $2.8-billion. These figures are “based on a valuation of $7 a share" of Green Growth. As of Thursday’s market close when the offer was announced, the suitor’s shares were worth $4.98 each.
To bridge the gap, Green Growth said it “expects to complete” a $300-million financing at $7 per share – a transaction that it seems to believe will boost the stock price. Yet at $7 a per share, the financing would be completed at roughly double the company’s volume-weighted average trading price in December. The company started trading on the Canadian Securities Exchange in mid-November.
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Green Growth also had a market valuation of a little less than $900-million as of Thursday − less than half of Aphria’s worth.
Aphria’s board took issue with these terms in its response. “The proposed offer is quite risky given Green Growth’s condition to complete a brokered financing at a price that is more than double the recent average of their share price, as a key term to the proposal,” board chair Irwin Simon said in a statement.
The board also noted that Green Growth “is attempting to acquire the company through a highly conditional offer at a significant discount to its current and future value.” Aphria’s stock had fallen 27 per cent since short-sellers put out reports in early December alleging the company vastly overpaid for assets in the Caribbean and Latin America.
Mr. Simon was appointed to the board late Thursday within minutes of Green Growth announcing its takeover proposal. In an e-mail, Aphria spokesman Dan Gagnier said the appointment was part of the normal-course process to advance its corporate governance. Aphria added that the move did not have any relation to the Green Growth proposal.
In its statement earlier on Friday, Aphria’s board noted that the company holds “a passive investment in Green Acre Capital Fund II, which we understand has invested in numerous emerging cannabis companies, including [Green Growth.]” Green Acre is the second-largest investor in Green Growth, according to Bloomberg, and Mr. Neufeld has been on the advisory board of Green Acre Capital.
To ensure objectivity, Aphria said it had established an independent committee of directors to consider the existing proposal, as well as any formal offer it receives. (The current offer is not a formal bid.)
The connections between Aphria, Green Growth and their backers run deeper than the Green Acre investment.
For one, Aphria − through its prior investment in U.S. company Liberty Health Sciences − has been tied to business dealings in the United States with the Schottenstein family, who are Ohio-based billionaires that own significant stakes in American Eagle and DSW Shoes.
Last year, a company called Schottenstein Aphria applied for different types of cannabis licences in Ohio, which would allow for activities such as cultivation and processing. In one filing with the State of Ohio Board of Pharmacy, a company known as Schottenstein Aphria III LLC listed key employees and backers. They included: three Aphria directors, including Mr. Neufeld; three members of the Schottenstein family; three members of the Serruya family, which founded Yogen Fruz and have been major investors in both Aphria and Liberty; and members of Liberty’s management team.
In Liberty Health’s most recent quarterly filings, the company noted that in October, the “State of Ohio Department of Commerce issued a provisional processing licence to Schottenstein Aphria II LLC, of which Liberty owns 50.1 per cent of, with the Schottenstein Group owning the remaining 49.9 per cent.”
In its e-mail, Aphria said its directors were only named in the Ohio filing because of Aphria’s prior stake in Liberty Health. Aphria added that it no longer owns any shares of Liberty: “The individuals named as it relates to Aphria do not, and have not ever, had an operating role at the entities.”
In another tie between Green Growth’s team and their target, Aphria director Shawn Dym was listed as a director of Green Growth in an October filing before the company started trading on the Canadian Securities Exchange. Mr. Dym did not respond to a request for comment.
A number of short-sellers betting on a fall in Aphria’s stock price pointed out the alleged ties on Friday. In response, a spokesperson for Green Growth wrote in an e-mail that these investors are playing "fast and loose with the facts related to a number of individuals and it does nothing to change the merits of the offer. Green Growth will launch and succeed in its bid.”
Green Growth also noted that the value of its bid, which assumes a $7-per-share price for Green Growth stock, “is not only reasonable but likely, especially if you consider the announcements the company has made in December alone.” Recent news includes a proposed expansion in Massachusetts and the acquisition of new licences in Nevada.
The Serruya family, Green Acre and Mr. Neufeld could not be reached for comment.
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