In the cannabis business, even the boardrooms are exciting. In a sector worth $12 billion, consolidation is happening at breakneck speed, as big outfits swallow up little firms and little companies brave the bigger ones.
This consolidation is, overall, a massive gift for investors, presenting us with uncountable opportunities for making money.
The right takeover "magic" can deliver monster windfalls.
But other times, these takeover bids can muddy the waters - severely - totally obscuring the way forward for you and your hard-earned capital.
The stakes are high. So it's critical you understand exactly what's happening in this ongoing story...
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This Isn't Exactly a New Story, but It's a Big One
One of Canada's "big five" cannabis companies, Aphria Inc. (NYSE: APHA), has been embroiled in a 1980s "Gordon Gekko"--style hostile takeover drama since late December 2018.
Its would-be buyer is Nevada-based Green Growth Brands Inc. (CSE: GGB). Marijuana investors will know Green Growth from the success of its cannabidiol (CBD) product "pilot" program that saw CBD placed in dozens of DSW Inc. retail outlets.
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In fact, Green Growth Brands is run by some of the most experienced retailing executives in the world - people who have seen a takeover or two during their careers. These are the folks who built L Brands Inc. (NYSE: LB), which owns Victoria's Secret and Bath & Body Works, into a retail giant.
As is the case with hostile takeover bids in any sector, there's been quite a lot of back and forth - some "he said, she said."
It's hard to see where this ends. So far, Aphria has called the bid "highly conditional" and far too low in any event.
Aphria has a point - a good one.
The Green Growth Brands offer would give Aphria shareholders 1.5714 shares of Green Growth Brands for each Aphria share owned. Green Growth Brands says that its offer is worth CA$10 per share, since it has new equity investors lined up to purchase Green Growth Brands equity for CA$7 per share. (1 Canadian dollar is worth $0.75 at this writing.)
Basically, Aphria is saying that even though its stock trades at CA$4.93 per share, if you assume that it is worth the CA$7 that it has new investors lined up to pay, then its offer is worth CA$10 a share.
There are two problems with Green Growth's argument. The first is that while it's great that Green Growth Brands is able to raise new equity at CA$7 per share, the stock isn't trading anywhere near that level. It was recently trading at CA$4.93 per share. When you do the math, CA$4.93 times the 1.5714 shares is only CA$7.74 per share.
And Aphria is trading at CA$13.37 per share.
The second problem is that even if Green Growth were to start trading at CA$7 per share, that price times the U.S./Canadian dollar exchange rate is only $11 per share.
That's still a discount to Aphria's current price.
So no matter what assumptions one might make, no how many growth scenarios there may be, Aphria shareholders would take a substantial hit if they took Green Growth's deal.
Turning up the heat, Green Growth has begun soliciting proxies from Aphria shareholders in their attempted hostile takeover.
The smart move in this case is the same whether you own Aphria or Green Growth or neither: Do nothing. Stand pat. Wait until the smoke clears. I can't recommend investors wade into this morass, and I can't see supporting Green Growth's hostile bid.
That said, mergers and acquisitions are absolutely vital to this stage of the industry's growth, and we cannot undervalue the significance of a hostile takeover to that growth, regardless of how the Aphria/Green Growth drama plays out.
There's a Lot to Like, but Not Enough
The idea of an Aphria/Green Growth combination isn't a bad one.
I like the idea of a cross-border cannabis powerhouse, even if it couldn't do much business across that border until the U.S. federal government makes cannabis legal across the country.
The combined resources of such a company would be formidable, and it would offer branding opportunities in the world's two largest cannabis markets even before the U.S. federal government acts.
In this case, there would be some downside - primarily the loss of Aphria's coveted New York Stock Exchange (NYSE) and Toronto Stock Exchange (TSX) listings, but the Canadian Securities Exchange is a sufficient liquidity provider these days.
And even though Green Growth Brands is the aggressor in this battle, its current shareholders would end up owning less than half the resulting company. So unless Green Growth offers a real premium to Aphria shareholders, what it's really asking Aphria shareholders to do is force Aphria to take over Green Growth Brands!
I like both these companies, and I'm looking forward to the end of this unfortunate, murky chapter in their growth.
These 3 Stocks Are the Key to 2019's Greatest Profits
The 2018 midterm election was a turning point for the cannabis industry.
We expect nothing short of historic profits by the end of the year.
But not all pot stocks will hand you life-changing wins. In fact, often the companies making headlines are least likely to see the biggest gains.
These three stocks, on the other hand, are flying under the radar... for now. Each of them could see exponential stock price acceleration at any moment, and if you get in before that happens, you could turn a token stake into a lifetime of wealth.
I don't know of any other sector providing anywhere near this level of growth now.
About the Author
Greg Miller started working on Wall Street in September, 1987, just a month before the “Black Monday” stock market crash.
During his career there, he became an expert in just about every kind of publicly traded security - from blue-chip and small-cap stocks to municipals, junk bonds, and derivatives. As a portfolio manager, Greg was responsible for over $500 million of assets in mutual funds and insurance company accounts.
After leaving the Street, he designed a successful options trading strategy and made lucrative tech investments for a financial publication. He has also helped develop new products and worked with other editors to hone their strategies. He’s always been dedicated to deep, fundamental research - and he always will be - because he believes buying the very best companies at the right price is the best way to amass wealth in the stock market.