Hostile Takeovers in the Cannabis Markets

Friends – another milestone today for the Cannabis public markets with Green Growth Brands’ announcement of a (possible) hostile bid for Aphria.  As you may recall, Aphria’s sort of been in the news lately for a short seller making some allegations about Aphria’s Latin American transactions (my blog post on this). Well, someone’s been paying attention and is now going to try to take advantage of Aphria’s hammered stock price by announcing the launch of a (possible) hostile bid for Aphria’s stock…..

https://www.bloomberg.com/news/articles/2018-12-28/pot-producer-aphria-spurns-2-1-billion-hostile-green-growth-bid?srnd=deals

Here’s GGB’s press release: link

Here’s Aphria’s response press release: link

A bit of capital markets background for those of you who never saw Wall Street.  A hostile takeover is where a buyer makes an unsolicited bid for a public company and the target rejects the bid.  Under US securities laws and caselaw (and I’m making the assumption the same is true under Canadian securities laws, though I’m definitely not a Canadian securities lawyer, and, by the way, none of this is legal advice), the target’s board has a duty to consider the bid (and they usually reject the first bid – never take the first bid).  If it’s rejected, the potential acquirer can launch a “tender offer”, meaning they send lots of paper to the shareholders generated by expensive lawyers and investment bankers and financial advisors trying to argue that the bid is fair, and then the target sends lots of paper to the shareholders generated by expensive lawyers and investment bankers and financial advisors trying to argue that the bid is not fair, and then they send paper proxy cards in pretty pastel colors asking the shareholders to vote for or against the bid.  And then the securities lawyers sue everyone.  Companies have ways of limiting hostile takeovers, like “poison pills” and “golden parachutes” and “white knights” and “the knish defense” (okay, that last one isn’t real, but I’ll invent it some day).

This announcement is great for two reasons, both of which I’ve discussed before.  First, it’s another example of the Cannabis public markets becoming like all other public markets.  Second, it’s necessary consolidation in the MSO marketplace.

What I’d like to focus on, though, is different. 

First, what’s interesting to me is that GGB didn’t actually launch a tender offer – they issued a press release about their possible intent to launch it.  Sure, they talked to Aphria’s board and all, but nothing has actually been done yet other than filing a press release (apparently, 6 hours (!) after they approached the board), and now it’s all over the financial press.  Nothing’s been filed with the Canadian authorities, and the press release doesn’t say when that’ll happen.  GGB’s press release also says that they might not even make the offer if they uncover anything materially adverse about Aphria. 

Typically, a bidder starts a takeover by publicly filing a nice, lengthy document with the SEC outlining the bid in heavy detail.  Sure, if GGB decides not to actually launch the tender, there may be some short-term investor blowback, but all they’ve done is state a possible intent to maybe launch a potential bid.  Or not.  I’m continually mystified by the way the Cannabis public markets are so heavily reliant upon, and driven by, press releases. 

Second, GGB is going to get this done with a C$300 million brokered financing, meaning they’re going to raise additional cash from public shareholders to finance it in part.  They note that GGB “expects that certain of its existing shareholders will commit to backstop” that C$300 million raise.  (a backstop is a firm commitment from an investor(s) to make any investment that other offerees won’t)  It’s something to launch a hostile takeover bid without having your financing tied down – public shareholders approving a takeover bid usually like to know that closing is certain, let alone likely.

Third, note this statement from the Bloomberg piece quoting GGB’s CEO, Peter Horvath:

While Quintessential’s allegations are “something to be concerned about,” the transaction, if successful, would take at least three months to complete, Horvath said. “In that time period, we should have an understanding if there is any overhang at all.”’

 

When is Aphria going to actually get to diligence if the allegations are legit?  The “hostile” part of “hostile takeover” sort of makes it seem like Aphria isn’t going to all of a sudden freely open its books and answer the kinds of questions to which, usually only, governmental authorities get answers.  It’s not every day you see someone acquire a company that has fairly serious allegations about financial fraud hanging out there, where the bidder is going to assume all of the regulatory risks and shareholder lawsuits if they’re true, but not actually knowable until after closing. 

Having been deep in the trenches of public deals for years and watching how the press/public views/skews them, I admit that it’s easy for me to sit out here from lovely Napa, California, starting at the mountains, writing about the curiosities of Cannabis capital markets, and that there’s so much we don’t know about GGB’s approach – they’re clearly advised by top-notch professionals, and they’ve got a substantial board and management team with serious experience.  Nonetheless, there is so much about those same capital markets, and the Cannabis business overall, that defies (disrupts?) convention, and that’s not always a good (or bad!) thing.

All the best for a healthy and prosperous 2019.

Excelsior!

Written by: Marc Hauser