Aphria Inc (TSX:APHA) Targeted With Takeover Offer: Why It’s a Bad Deal

Aphria Inc (TSX:APHA)(NYSE:APHA) has struggled this year, but investors shouldn’t be getting desperate just yet.

Yesterday, we learned that Aphria Inc (TSX:APHA)(NYSE:APHA) had become a takeover target by U.S. cannabis company Green Growth Brands Ltd. (CNSX:GGB). Green Growth had offered a swap of stocks where Aphria investors would get 1.5714 shares of Green Growth’s shares in exchange for one Aphria share. As of Thursday’s valuations, that would equate to a price of about $11 per share for Aphria’s stock, which is more than 45% higher than its closing price of $7.57.

Green Growth claims it did initially attempt to negotiate a friendly deal, but after that failed to go anywhere, the company chose to go the hostile route instead. However, convincing investors that a price of $11 is a good offer for a stock that was trading at more than $20 earlier in the year might prove to be a bit of a challenge. The only reason it appears to be a premium is that Aphria’s stock price has done so poorly this year. It was down 59% year to date heading into Friday’s trading.

Not only have pot stocks as a whole been struggling, but Aphria has been hit with a critical short-seller report that sent its stock down even further. It makes the company an easier target for a takeover since at a lower price point, as frustrated investors may be willing to take the offer rather than wait and hope that things improve.

Aphria responds

It didn’t take long to get a response from Aphria’s management, as it issued a release on Friday morning. Aphria’s Chair, Irwin Simon, stated, “While we appreciate GGB’s interest in the value we have created at Aphria and our significant growth prospects, their proposal falls short of rewarding our shareholders for participating in such a transaction.”

Simon also pointed out the recent volatility in Green Growth’s stock price that presents a lot of risk to investors. As of Thursday’s close, Green Growth’s stock was just under $5 per share. Given how unstable pot stocks have been lately, it’s hard to gauge whether Green Growth’s current value is inflated and really worth its price tag.

Could we see more offers coming?

The offer from Green Growth comes after the Farm bill in the U.S. was just passed a few weeks ago. With the U.S. now permitting hemp-derived cannabidiol at the federal level, it could open the door to potential deals between U.S. and Canadian cannabis companies. If Aphria investors balk at this offer from Green Growth, it may not end up being the only offer they get.

Bottom line

There’s a lot of change happening in the cannabis industry and we’ll likely see even more in 2019. With Aphria’s stock coming off a 52-week low, I’d be surprised if the share price doesn’t bounce back next year. The only way that Green Growth’s offer looks good is based on today’s valuation, and the optics of it could be very different in a few weeks or months from now.

As a result, Aphria investors might be best off just staying the course and seeing how the year plays out, particularly with recreational sales now factoring into their results.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor David Jagielski has no position in any of the stocks mentioned.

More on Investing

Blocks conceptualizing Canada's Tax Free Savings Account
Dividend Stocks

How to Use Your TFSA to Double Your TFSA Contribution

If you're looking to double up that TFSA contribution, there is one dividend stock I would certainly look to in…

Read more »

Income and growth financial chart
Investing

A Top-Performing U.S. Stock That Canadian Investors Really Should Own

Amazon (NASDAQ:AMZN) is starting to run faster in the AI race, making it a top U.S. pick for 2025.

Read more »

Person uses a tablet in a blurred warehouse as background
Tech Stocks

2 Canadian AI Stocks Poised for Significant Gains

Here are two top AI stocks long-term investors may want to consider before the end of the year.

Read more »

man touches brain to show a good idea
Investing

3 No Brainer Tech Stocks to Buy With $500 Right Now

Here are three no-brainer tech stocks long-term investors on a limited budget may want to consider right now.

Read more »

woman looks at iPhone
Dividend Stocks

Retirees: Is TELUS Stock a Risky Buy?

TELUS stock has long been a strong dividend provider, but what should investors consider now after recent earnings?

Read more »

Concept of multiple streams of income
Dividend Stocks

Is goeasy Stock Still Worth Buying for Growth Potential?

goeasy offers a powerful combination of growth and dividend-based return potential, but it might be less promising for growth alone.

Read more »

A person looks at data on a screen
Dividend Stocks

How to Use Your TFSA to Earn $300 in Monthly Tax-Free Passive Income

If you want monthly passive income, look for a dividend stock that's going to have one solid long-term outlook like…

Read more »

Man holds Canadian dollars in differing amounts
Investing

Is Dollarama Stock a Buy?

Although Dollarama's stock is expensive and has rallied by more than 40% over the last year, is it still worth…

Read more »