The biggest source of news for marijuana stocks in 2019 has undoubtedly been the rush of mergers and acquisitions in the industry.
Mergers and acquisitions can have serious benefits for investors. Companies being purchased can see their share prices skyrocket. The acquirers can benefit from the mergers, creating new synergies for their companies.
And the merger we're about to discuss could be one of the biggest catalysts yet for marijuana stocks in 2019...
What This Takeover Means for Marijuana Stocks in 2019
Aphria Inc. (NYSE: APHA) is among Canada's "Big Five" marijuana-based companies. It's been in a hostile takeover situation since late 2018.
Green Growth Brands Inc. (CSE: GGB), a company based in Nevada, wants to buy Aphria. GGB is best known to investors because of its success in placing cannabidiol-based products on a pilot basis in large retail outlet DSW Inc.
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Green Growth Brands is headed by experienced retailers who have built retail giants. Case in point: L Brands Inc. (NYSE: LB), the parent of Victoria's Secret and Bath & Body Works, both well-recognized names in the retail sector.
Aphria believes the offer is much too low and calls the move to purchase it "highly conditional."
Green Growth Brands has offered 1.5714 shares of Green Growth Brands for every Aphria share. GGB indicates that the offer is worth CA$10 per share because it has new equity in place to buy GGB equity for CA$7 per share. (CA$1 = US$0.75 at press time).
But Aphria management counters with this: GGB shares sell for CA$4.93 per share now. Assuming that you can add the CA$7 from new investors, the offer should be worth at least CA$10 per share.
There are two difficulties with the argument Green Growth is making. First, shares aren't trading near CA$7. Recent trades were nearer to CA$4.93 per share. CA$4.93 multiplied by the 1.5714 shares results in just CA$7.74 a share.
And Aphria shares sell at CA$13.37 a share.
Second, even if GGB started selling for CA$7 a share, that only equates to $11 per share given the U.S. dollar/Canadian dollar rate of exchange.
It's a discount to the current price of APHA.
Current APHA shareholders would lose under the current offer no matter what growth may lay on the other side of the merger and no matter how optimistic future scenarios might be.
GGB has started to solicit proxies from APHA shareholders - a very hostile takeover move.
What should you do if you have Aphria or Green Growth shares -- or neither?
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Nothing.
Greg Miller, Money Morning Director of Cannabis Investing Research, thinks the prudent course is to wait. GGB's hostile takeover bid isn't good news for investors now, and neither is APHA, given the uncertainty.
That's not to say mergers and acquisitions can't be highly important in a rapidly growing and innovating sector. But hostile takeovers are likely not the path to biggest profit.
It's not that the plan of combining Aphria and Green Growth is a bad idea. It would create a strong cross-border marijuana company in 2019. Pot is fully legal in Canada.
Plus, the two companies' combined strengths would be robust. They could become a known branded entity in two countries, the United States and Canada, even if it takes a while before weed is fully legal in the U.S.
But this merger also presents downside. Aphria would lose the highly coveted listings on the New York Stock Exchange and Toronto Stock Exchange it currently has. The Canadian Securities Exchange does provide sufficient liquidity, however.
GGB is the aggressor, but even if it is successful, its shareholders would wind up possessing under half of the merged company. Ultimately, it's asking Aphria shareholders to force the company to take over GGB - unless it can provide a real premium, which it's not currently doing.
Investors need to avoid this situation and wait until it's over.
However, the fact that marijuana mergers have become such a huge trend is an extremely bullish catalyst for the entire marijuana market...
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.